Capital Returns: Investing Through the Capital Cycle: A Money Manager's Reports 2002-15
- Downloads：1384
- Type：Epub+TxT+PDF+Mobi
- Create Date：2021-04-24 11:55:30
- Update Date：2025-09-06
- Status：finish
- Author：Edward Chancellor
- ISBN：1137571640
- Environment：PC/Android/iPhone/iPad/Kindle
- Download
Summary
We live in an age of serial asset bubbles and spectacular busts。 Economists， policymakers， central bankers and most people in the financial world have been blindsided by these busts， while investors have lost trillions。
Economists argue that bubbles can only be spotted after they burst and that market moves are unpredictable。 Yet Marathon Asset Management， a London-based investment firm managing over $50 billion of assets has developed a relatively simple method for identifying and potentially avoiding them: follow the money， or rather the trail of investment。
Bubbles – whether they affect a whole economy or merely a single industry， tend to attract a splurge of capital spending。 Excessive investment drives down returns and leads inexorably to a bust。 This was the case with both the technology bubble at the turn of the century and the US housing bubble which followed shortly after。 More recently， vast sums have been invested in mining and energy。
From an investor's perspective， the trick is to avoid investing in sectors， or markets， where investment spending is unduly elevated and competition is fierce， and to put one's money to work where capital expenditure is depressed， competitive conditions are more favourable and， as a result， prospective investment returns are higher。
This capital cycle strategy encourages investors to eschew the simple 'growth' and 'value' dichotomy and identify firms that can deliver superior returns either because capital has been taken out of an industry， or because the business has strong barriers to entry （what Warren Buffett refers to as a 'moat'）。 Some of Marathon's most successful investments have come from obscure， sometimes niche operations whose businesses are protected from the destructive forces of the capital cycle。
Capital Returns is a comprehensive introduction to the theory and practical implementation of the capital cycle approach to investment。 Edited and with an introduction by Edward Chancellor， the book brings together 60 of the most insightful reports written between 2002 and 2014 by Marathon portfolio managers。 Capital Returns provides key insights into the capital cycle strategy， all supported with real life examples – from global brewers to the semiconductor industry - showing how this approach can be usefully applied to different industry conditions and how， prior to 2008， it helped protect assets from financial catastrophe。 This book will be a welcome reference for serious investors who looking to maximise portfolio returns over the long run。
Economists argue that bubbles can only be spotted after they burst and that market moves are unpredictable。 Yet Marathon Asset Management， a London-based investment firm managing over $50 billion of assets has developed a relatively simple method for identifying and potentially avoiding them: follow the money， or rather the trail of investment。
Bubbles – whether they affect a whole economy or merely a single industry， tend to attract a splurge of capital spending。 Excessive investment drives down returns and leads inexorably to a bust。 This was the case with both the technology bubble at the turn of the century and the US housing bubble which followed shortly after。 More recently， vast sums have been invested in mining and energy。
From an investor's perspective， the trick is to avoid investing in sectors， or markets， where investment spending is unduly elevated and competition is fierce， and to put one's money to work where capital expenditure is depressed， competitive conditions are more favourable and， as a result， prospective investment returns are higher。
This capital cycle strategy encourages investors to eschew the simple 'growth' and 'value' dichotomy and identify firms that can deliver superior returns either because capital has been taken out of an industry， or because the business has strong barriers to entry （what Warren Buffett refers to as a 'moat'）。 Some of Marathon's most successful investments have come from obscure， sometimes niche operations whose businesses are protected from the destructive forces of the capital cycle。
Capital Returns is a comprehensive introduction to the theory and practical implementation of the capital cycle approach to investment。 Edited and with an introduction by Edward Chancellor， the book brings together 60 of the most insightful reports written between 2002 and 2014 by Marathon portfolio managers。 Capital Returns provides key insights into the capital cycle strategy， all supported with real life examples – from global brewers to the semiconductor industry - showing how this approach can be usefully applied to different industry conditions and how， prior to 2008， it helped protect assets from financial catastrophe。 This book will be a welcome reference for serious investors who looking to maximise portfolio returns over the long run。
Reviews
Tim
，
Generally insightful book。 The last section on a fictitious company was probably more suited for internal to Marathon consumption and should have been excluded from the book。
Mindy
，
其实这书看过。。和EG同学讨论又重新看了一遍。。。capital account也有趣。最后还暗暗挖苦了下巴菲特的做法。。
Library of
，
A very good book for anyone who want to understand business and investing。 Read it a couple of years ago and leave my notes below: https://libraryof。xyz/portfolio/capit。。。Capital tend to find its way to companies with high returns and leave companies whose returns are less than the cost of capital。 This creates a constant and dynamic capital cycle。 This pattern has been observed for a long time and can be explained by the fact that humans have a tendency to extrapolate current trends。 Studies in A very good book for anyone who want to understand business and investing。 Read it a couple of years ago and leave my notes below: https://libraryof。xyz/portfolio/capit。。。Capital tend to find its way to companies with high returns and leave companies whose returns are less than the cost of capital。 This creates a constant and dynamic capital cycle。 This pattern has been observed for a long time and can be explained by the fact that humans have a tendency to extrapolate current trends。 Studies in behavioral economics have shown that analysts and investors overestimate how long positive and negative trends are expected to continue。 Even experienced executives misjudge the duration of cycles。 In good times the market seems to suffer from what investor Francis Chou calls “The Bladder Syndrome” – “the more cash one holds， the greater pressure to piss it away”。EXTRAPOLATION BUILDS VALUATION。 Investors quickly get used to new valuation multiples， expressed in the book by “seven is the new five”， which refers to how 7x EBITDA can become the new normal。 This creates bubbles and drives down future returns。COMPANIES FALLS AS EPICURIANS。 A successful company may in the future suffer from a “triple whammy” when: （1） management has “thrown good money after mediocre / bad ideas” which will be punished with lower future return on capital， （2） historically high profitability has attracted gold seekers to the industry which changes the competitive situation for the worse， and （3） historically high profitability may have driven up the valuation， which leads to a multiple contraction when the company is no longer perceived as fantastic。COMPANIES RISES AS STOICS。 A company that has struggled for its survival for several years can sometimes be an excellent investment as a result of: （1） tough times have required management to get rid of unnecessary costs which can lead to higher future profitability， （2） low-profit industries have often forced the weakest players into bankruptcy while few / no new players have entered the market which has eased the competitive situation， and （3） profitability below the cost of capital has driven investors out， which when profitability rises， opens up for multiple expansion”Companies which earn above their cost of capital tend to invest more， thereby driving down their future returns， while companies which fail to earn their cost of capital behave in the opposite way” – Benjamin Graham， Security AnalysisFOCUS ON SUPPLY。 Entry barriers is what prevent supply from increasing sharply in response to high profitability。 The future of supply is less uncertain than demand， and is therefore easier for investors to forecast。STRONG THREES STANDS。 Capital cycle analysis is strongly influenced by J。A。 Schempeter’s concept of ‘creative destruction’; competition and innovation create an ever-changing economy that encourages productivity improvements。 A recession can be likened to a forest fire that burned down weaker trees so that healthy plants can flourish。SHIPPING PRE THE FINANCIAL CRISIS。 Freight rates on Panamax vessels increased 10x during the period 2001–2007， when China sharply increased its industrial activities。 The high profitability meant that many new vessels were built and as these were delivered， freight rates in the spot market fell。 As it takes two years from ordering a vessel to delivery， supply continued to increase even after profitability fell， which further aggravated the situation。WIND POWER PRE FINANCIAL CRISIS。 The authors’ fund， Marathon， invested in 2003 in the Danish wind power company Vestas Wind Systems， which share rose 40x during the years up until 2018， due to strong demand。 The key figure， Capex-to-depreciation， went from just over 1x in 2005 to almost 5x in 2008。 A sharp overcapacity then became a reality for the wind power sector as new capacity was set into operation。 In connection with the financial crisis， demand for new projects came to a halt and Vestas’ share fell 96% from its peak。THE OIL MARKET PRE FINANCIAL CRISIS。 Analysts predicted increased energy demand from emerging markets and oil prices were expected to exceed $200 dollars per barrel。 The managers of the oil companies had “anchored” their expectations at these levels and therefore continued with drilling and investments。 This eventually led to oversupply。 The oil companies had also borrowed heavily during the good times， which made them extra sensitive to a sharp correction in the oil price。STEADY-EDDIE WINS THE RACE。 Studies have shown that companies with low asset growth have had higher returns than companies with high asset growth。 Low interest rates， for example， mean that more people invest （on weak bases） at the same time as asset prices rise – until reality catches up。 The authors of The Journal of Finance believe that a company’s asset growth is a stronger variable for return than traditional value investment （low price to equity）， size （market capitalization） or momentum （short and long term）。 。。。more
Navdeep Pundhir
，
Beyond one or two central ideas， which could have well been presented as an article or at best a paper， they compiled a book full of case studies which is an epitome of what an MBA can do to a person's intellect。 Great Idea， Bad Book！ Beyond one or two central ideas， which could have well been presented as an article or at best a paper， they compiled a book full of case studies which is an epitome of what an MBA can do to a person's intellect。 Great Idea， Bad Book！ 。。。more
Murali Krishna Chaitanya Podile
，
Much of the book is repetitive，but to be fair，that was bound to happen because it's a collection of letters sent to investors of the fund。But the introduction by Chancellor is very insightful and is the most important part of the book。 Much of the book is repetitive，but to be fair，that was bound to happen because it's a collection of letters sent to investors of the fund。But the introduction by Chancellor is very insightful and is the most important part of the book。 。。。more
Gianfran
，
It's the offer that counts， not the demand。 Every industry has its capital cycle， you gotta understand it。 Be aware of politics and China。 It's the offer that counts， not the demand。 Every industry has its capital cycle， you gotta understand it。 Be aware of politics and China。 。。。more
Alberto Blanco Garcés
，
Good book about capital cycles and the financial sector。 It presents several interesting stories related to market cycles， focused on the banking sector from different countries。 Its satirical humor， more present until the end of the book is a good point too。 It is not an easy book though， and it is longer than it seems。
Ben
，
this is one of the best investing books i've read this is one of the best investing books i've read 。。。more
Zhou Fang
，
This is one of the best investing/business books I have ever read。 The first chapter alone is worth the price of the book。 The book is a compilation of letters written by portfolio managers of Marathon Asset Management in 2002-2015， edited by Edward Chancellor （author of Devil Take the Hindmost）。 The central idea of the book is that supply of capital is the key determinant of returns in the industry， as it determines competitive forces and is also much easier to analyze than demand。 Capital inve This is one of the best investing/business books I have ever read。 The first chapter alone is worth the price of the book。 The book is a compilation of letters written by portfolio managers of Marathon Asset Management in 2002-2015， edited by Edward Chancellor （author of Devil Take the Hindmost）。 The central idea of the book is that supply of capital is the key determinant of returns in the industry， as it determines competitive forces and is also much easier to analyze than demand。 Capital investment drives mean reversion of returns in an industry， so understanding this cycle is crucial to investment analysis。 Therefore， capital allocation by managers is of paramount importance。 This is summarized within the very first few sentences of the book:"Typically， capital is attracted into high-return businesses and leaves when returns fall below the cost of capital。 This process is not static， but cyclical - there is constant flux。 The inflow of capital leads to new investment， which over time increases capacity in the sector and eventually pushes down returns。 Conversely， when returns are low， capital exits and capacity is reduced; over time， then， profitability recovers。" The essence of the book is outlined in the closing bullet points in the chapter， with the rest of the book being case studies of this approach:"The essence of capital cycle analysis can thus be reduced to the following key tenets:-Most investors devote more time to thinking about demand than supply。 Yet demand is more difficult to forecast than supply。-Changes in supply drive industry profitability。 Stock prices often fail to anticipate shifts in the supply side。-The value/growth dichotomy is false。 Companies in industries with a supportive supply side can justify high valuations-Management's capital allocation skills are paramount， and meetings with management often provide valuable insight。-Investment bankers drive the capital cycle， largely to the detriment of investors。-When policymakers interfere with the capital cycle， the market-clearing process may be arrested。 New technologies can also disrupt the normal operation of the capital cycle。-Generalists are better able to adopt the "outside view" necessary for capital cycle analysis。-Long-term investors are better suited to applying the capital cycle approach。"A few other takeaways from the book:1。 Identify industries where cooperative behavior is likely to evolve。 Complexity， politics， and transaction frequency all are likely to hinder such evolution2。 Size of a pinch point （Boston dock capacity） and magnitude of sustainability （why should the dock be in Boston at all？）3。 Procyclical management and capital markets behavior mean that corporate earnings actually LAG GDP over long period of time4。 Counterintuitively， strong demand growth can actually be the direct cause of value destruction as a flood of capital enters the industry5。 Seek information that is relevant to the longer term as it is more durable and has less competition6。 Be careful about cozying up too much to management as it creates "capture" and the analyst becomes a mouthpiece for the management7。 Buying shares entails outsourcing capital allocation for the company to the company's managers。 If a manager retains 10% of a company's net worth over 10 years， he/she will be responsible for 60% of all capital employed in the company after 10 years。8。 Pay attention when management compliments a competitor9。 Number of IR in attendance for a meeting/ call a good indicator of cost-consciousness10。 China's debt-fueled fixed-asset investment has resulted in low returns for shareholders despite tremendous economic growth 。。。more
Tag
，
This book is a great read because it’s a compilation of actual letters written at the time （akin to Howard Marks’ letters） as opposed to a look back analysis written at a specific time。 The topics here are wide ranging and all encompassing， from Irish banks， German banks， beers， airlines， commodities to Chinese SOEs and semiconductors — all with the same thesis that 1） we should focus more on supply rather than demand， 2） best economics appear when the cost of product is low relative to its impo This book is a great read because it’s a compilation of actual letters written at the time （akin to Howard Marks’ letters） as opposed to a look back analysis written at a specific time。 The topics here are wide ranging and all encompassing， from Irish banks， German banks， beers， airlines， commodities to Chinese SOEs and semiconductors — all with the same thesis that 1） we should focus more on supply rather than demand， 2） best economics appear when the cost of product is low relative to its importance （eg semiconductor chips for airbags）， 3） the ability of managers to allocate capital efficiently is underrated。 A necessary read for long term investors。 。。。more
Harsh Thaker
，
A very thoughtful book on the cycles every sector go through， I believe that marathon asset company works on very simple of investing where capital investment is at lowest and avoiding the capital investment is at its peak。
Jonathan
，
A little dense， but great for the supply-side of capital returns。。。
Larry Liao
，
Pattern recognition。
Joel Gray
，
THE REAL QUESTION IS DO COMPANIES REDEPLOY FREE CASHFLOW EFFECTIVELY， OR DO THEY WASTE IT。Capital is attracted into high-return businesses and leaves when returns fall below the cost of capital。Events associated with asset expansion - such as M&A， equity issuances and new loans - tend to be followed by low returns。 Conversely， events associated with asset contraction - including spin-offs， share buybacks， debt repayments and dividend initiations - are followed by positive excess returns。Our port THE REAL QUESTION IS DO COMPANIES REDEPLOY FREE CASHFLOW EFFECTIVELY， OR DO THEY WASTE IT。Capital is attracted into high-return businesses and leaves when returns fall below the cost of capital。Events associated with asset expansion - such as M&A， equity issuances and new loans - tend to be followed by low returns。 Conversely， events associated with asset contraction - including spin-offs， share buybacks， debt repayments and dividend initiations - are followed by positive excess returns。Our portfolios have tended to be skewed towards companies where successful entrepreneurs turn their companies and retain sizeable shareholdings。Our job is to create goodwill， not pay other people for goodwill。The most common successful corporate trait is an emphasis on cost control。If managers have budget targets it becomes more difficult to stay out of the market when pricing is unfavourable （particularly important not to have budgets in cyclical/commodity industries）。Our capital approach has failed to work at times when we underestimated the impact on industires of political and legal intereference， disruptive technologies and globalisation。 。。。more
Gaurav Juneja
，
Very insightful investing book‘Capital Cycle’ is an great way to think about any industry producing commodity products - certainly adds a tool in my investing arsenal。 Also helpful book for understanding banks / financials investing
Turgut
，
Surprisingly great book！ 👍
Sharath Reddy
，
Good to read， but may be hard to appreciate unless you lived this period in public markets
Nam KK
，
The first twenty pages are just perfect。 The rest are collection of newsletters sent to the fund investors。 Should have hired an editor for a large part of those。
Joao Camargo
，
One of the best financial markets books I have ever read。 It is short but dense in information。 It is written by practitioners that have experienced lots of challenges in their life and they are able to summarize it in a very ludic way。 Recommended for financial markets professionals， entrepreneurs， corporate executives and people interested in understanding the dynamics of markets and companies。
Kaustubh Sule
，
A great account of a thinking process of Marathon Asset Management。 Usually we think from the perspective of demand side economics for investing。 Demand side is difficult to predict and hence difficult to use for investing。 On the other hand， Supply Side is relatively easier than demand side prediction and hence more useful in longer term investing。
InvestingByTheBooks。com
，
This is the even more brilliant sequel to the already superb 2004 book Capital Account。 Edward Chancellor， the author of the classic Devil Takes the Hindmost， picks and chooses among the 2002 to 2015 Global Investment Reviews written by money manager Marathon Asset Management。 The essays are sorted into themes。 The benefits for us all of keeping some sort of diary， writing monthly investment letters or in some other way document happenings， the zeitgeist， thoughts and feelings become more than a This is the even more brilliant sequel to the already superb 2004 book Capital Account。 Edward Chancellor， the author of the classic Devil Takes the Hindmost， picks and chooses among the 2002 to 2015 Global Investment Reviews written by money manager Marathon Asset Management。 The essays are sorted into themes。 The benefits for us all of keeping some sort of diary， writing monthly investment letters or in some other way document happenings， the zeitgeist， thoughts and feelings become more than apparent。 This wasn’t too long ago， but things that shouldn’t be forgotten are starting to fade away from ones memory。 Here Marathon lets anybody peak into their diary。Capital Returns has three important sections。 The first one is what sets this book apart from its prequel; Edward Chancellor has written a terrific introduction that spot-on describes the main features of Marathon’s investment philosophy。 The next section presents essays that dive deeper into this philosophy and the final one looks to the buildup of， the crescendo of and the resurrection from the Great Financial Crisis。 Although there are several interesting topics in the latter they are pretty well discussed and I will focus on the investment philosophy parts。As any investment philosophy it contains several components but what differentiates Marathon’s thinking is their focus on The Capital Cycle and a number of industry supply factors。 Here they clearly stand out。 It’s been a long time since reading an investment book gave so many impulses like “I should start a time series of this” or “Hmm， perhaps I could build a model of that” etc。So what is The Capital Cycle？ It’s really no magic; in good times when returns on investments are impressive and corporate valuations are higher than the replacement cost of the productive assets， industry capacity increases by pooling of new financing – equity and credit - into the area， allowing existing companies upping investments and new companies entering the market。 All earn good money but after a while the added supply and increased competition will overwhelm demand and the cycle will turn。 In troubling times productive capacity will be retired， companies will leave the market or simply go bankrupt and eventually the lessened supply and competition will face a demand that is improving and the cycle of over and underinvestment starts anew。What I see as unique in this is the strong focus on the supply side and how they systematically track a wide number of parameters to understand the cycle on industry， sub-industry and corporate level。 Not all industries are capital heavy but you can still get a fair grip of whether industry capacity is increasing or decreasing。 True to this analysis， the evaluation of corporate managers and their incentive schemes also zeros in on capital usage。 How managers understand the capital cycle and allocate capital is critical for long-term corporate success and then you cannot have incentive schemes that promote myopic profit maximation and “optimal leverage” at any given moment in time。The book discusses two types of investment cases that follow from the cycle， the franchise stock that can retain a ROIC longer than the market price and the turnaround case that will improve its ROIC more or faster than the market price。 Importantly， the turnaround is not necessarily a traditional bottom-up case， but is rather found by a top down analysis first and corporate analysis second。 This opens up more investment options。The writing almost has the same philosophical depth and enjoyable language as that of Howard Marks， the theoretical depth isn’t exactly that of a Michael Mauboussin – but not too far away。 What comes on top of this， as the cherry on the cake， is the down to earth and vivid discussion on business operations and day-to-day investing。Buy this book， read it， think hard and reread it。 。。。more
Duy Nguyen
，
Please do yourself a favor and study this book。 Then， never forget that thinking about supply is so much easier and important than thinking about demand （growth）。 Buffett's style is rested on this premise。 Cheap valuation gives you room in case there is no demand growth; moats makes supply growth irrelevant。 Please do yourself a favor and study this book。 Then， never forget that thinking about supply is so much easier and important than thinking about demand （growth）。 Buffett's style is rested on this premise。 Cheap valuation gives you room in case there is no demand growth; moats makes supply growth irrelevant。 。。。more
Saket Saurabh
，
recommended to investors as well as those interested in world of finance。。。
Javier HG
，
Este es un libro "minoritario"， ya que creo que gustará únicamente a aquell@s que estén familizarizad@s con el sector financiero y， en concreto， con el de inversiones。 Esto no significa que el libro esté escrito en un lenguaje enrevesado o demasiado técnico， simplemente que para disfrutarlo al 100% hay que estar familiarizad@ con términos como múltiplos， apalancamiento， retorno sobre capital empleado， titulización， o los conflictos de interés que todavía suceden en la industria financiera。Aun co Este es un libro "minoritario"， ya que creo que gustará únicamente a aquell@s que estén familizarizad@s con el sector financiero y， en concreto， con el de inversiones。 Esto no significa que el libro esté escrito en un lenguaje enrevesado o demasiado técnico， simplemente que para disfrutarlo al 100% hay que estar familiarizad@ con términos como múltiplos， apalancamiento， retorno sobre capital empleado， titulización， o los conflictos de interés que todavía suceden en la industria financiera。Aun con algunas palabras técnicas aquí y allí， el libro está muy bien escrito。 Es una recopilación de las cartas que la gestora estadounidense Marathon envía regularmente a sus inversores。 Marathon es una gestora oportunista， y en "Capital returns" se explica detalladamente cómo analizan y deciden invertir。 Su estilo es muy similar al de Warren Buffett: "Sé avaricioso cuando los demás tienen miedo， y ten miedo cuando los demás son avariciosos"。 。。。more
Zharfan
，
Since I read Capital Returns， I can feel the impulses flowing in and out of my neurons more than ever before it started to normalize back to its mean rate。 Therefore， before my return on neuron employed （RONE） falls below my cost of neuron （CON）， I need to employ my neurons elsewhere i。e reading books with still abnormally high RONE。 I found out that Capital Returns has a predecessor called Capital Account。 The problem is that it is very hard to get hold of that book。 Anyone can help me？
Yes & Not Yes
，
Awesome book for the serious investor。 Lots of great insights and interesting examples。 Only bad thing about the book was the last chapter of letters from a fictitious investment banker， which I advise readers skip entirely。
Justin
，
Intelligent， but mostly over my head （at least at the rate I read this book， which was in turn driven by its seemingly low amount of actionable material）。 The introduction was quite useful and the rest of the book might be useful to stock pickers， but for a mutual fund user like me the introductory chapters were the only useful ones。 That being said， the introductory chapters were more actionable than many of the other money books I've read。 Intelligent， but mostly over my head （at least at the rate I read this book， which was in turn driven by its seemingly low amount of actionable material）。 The introduction was quite useful and the rest of the book might be useful to stock pickers， but for a mutual fund user like me the introductory chapters were the only useful ones。 That being said， the introductory chapters were more actionable than many of the other money books I've read。 。。。more
Madhur Rao
，
A very nice book talking about the supply side economics driven by Schumpeter's famous argument around "creative destruction"。 The book highlights that instead of focusing on Demand （which is subject to narratives and large variations around estimates）， one should try and focus on Supply （which can be quantified） depending on what competitors are doing。 Prisonner's Dilemma is another thought which leads to generally "tit for tat" behaviour amongst peers。 A lot of examples in industries like COD， A very nice book talking about the supply side economics driven by Schumpeter's famous argument around "creative destruction"。 The book highlights that instead of focusing on Demand （which is subject to narratives and large variations around estimates）， one should try and focus on Supply （which can be quantified） depending on what competitors are doing。 Prisonner's Dilemma is another thought which leads to generally "tit for tat" behaviour amongst peers。 A lot of examples in industries like COD， shipping， mining， banking， testing services， brands etc from a European perspective， but the lessons are applicable globally。 A book which I will revisit again for sure。 。。。more
Thomas Neuhaus
，
An important book for all fundamental investors to read。 Explains the causes and ultimate resolution of the capital cycle using clear examples。
その人
，