Monday, July 25, 2016

Capital Returns

Despite a title better suited to a superhero sequel movie, Capital Returns made a big splash on my Twitter feed, so it became a must read for me.

The premise of the book is fairly simple. Hot industries attract capital, resulting in over-investment and overcapacity, resulting in low returns and subsequent under-capacity. It is when capital flees the industry that is the best time to invest.

But executing such a strategy is the difficult part. You have to tell the difference between secular and cyclical trends, and determine which companies will last and which will not. This book takes the reader through a cycle in a number of industries or segments, by providing the running commentary of Marathon Asset Management as the company waded through the cycle.

The amount of work put in by these guys seems enormous from their writings. They clearly do a lot of reading. I wish I had read some of this stuff a few years ago, as it would have saved me some money on some Chinese frauds. (Marathon was very prescient in seeing the signs years before I idiotically bought some of that crap.)

Marathon grew out of the UK, so the book has a real European bent: I hadn't heard of a lot of the companies discussed. But the principles exemplified are timeless (at least until there actually is an efficient market in real life, and not just in textbooks).



John Chew said...

The key is to understand it the amount of excess investment that goes into a sector. In the late stages of a boom it is pretty obvious. Note mining in 2007 or the internet companies in 1997-2000.

You want to invest in money losing cyclical companies when their industry is starved for capital over an extended period of time.

But NO ONE knows the exact timing.


I remember the Chinese incident as well.
This was after all my first Blog

James P said...

Thanks for your book recommendation, will find time to read that. As for the comment above about the mining companies (or all capital intensive companies, for ex. airlines, car manufacturers, steel... ), my strategy is simple - Avoidance. ;)

As Mark Twain said in hundreds years ago,

"A gold mine is a hole in the ground with a liar standing on top of it."

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