Capital Returns: Investing through the Capital Cycle

This book “Capital Returns-Investing through the Capital Cycle” is a collection of reports written by investment professionals at Marathon Asset Management.

The premise of the Book is that investors frequently have an “inside view” of the Company and forget to look at the “outside view” i.e. the Competition or “the supply side”

This leads to the famous business cycle/capital cycle where boom is followed by bust and again by boom.We have witnessed this time and again in our own markets in numerous sectors like sugar,capex,paper,real estate etc

The book is littered with examples from Europe and China wherein investors paid top $ for buying companies at the top of the Capital Cycle only to lose large amounts when the cycle turned.

Capital Cycle Analysis is really about how competitive advantage changes over time,viewed from an Investor’s perspective.This leads to a key investment insight-when analyzing the prospects of stocks,it is necessary to take into account asset growth, at both the company and the sectoral level.

Since the future is uncertain,the Book suggests it is better to focus on supply (Competition) than demand.

This is v relevant in the Indian context.

As examples:

-Telecom sector is ravaged due to fresh supply by a new entrant (Reliance Jio).

-PSU Banks/Insurers have seen their market shares gobbled up by private players etc

-Paint industry has been able to maintain their fat profits owing to lack of competition

-Flipkart is no longer India’s ecommerce darling owing to Amazon

and so on and on

The book contains lots of nuggets on meeting managements.One of them being avoid companies which have a fancy corporate HQ !The other being avoid companies ¬†whose CEO’s are impeccably dressed and have a need for glamour…these will lead them to take decisions which will put them in the limelight. Anilbhai and Biyani come to mind !

This book also contains a very useful list of 7 Deadly Sins of Banking:

  1. Imprudent Asset-Liability mismatches
  2. Supporting Asset-Liability mismatches by clients
  3. Lending to “Can’t Pay,Won’t Pay” types
  4. Reaching for growth in unfamiliar areas
  5. Engaging in off balance sheet lending
  6. Getting sucked into virtuous/vicious cycle dynamics
  7. Relying on the rearview mirror

This Book is a serious read and meant for professional investors.As such,it is not suitable for everyone.

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