Supply is Measurable, Demand is Storytelling - Capital Cycle Investing with Django Davidson of Hosking Partners.
In his legendary book Capital Account, Chancellor said that: Over the long run, it is a company’s return on capital, not changes in quarterly earnings, which primarily determines the direction of its share price. The return on capital of any company is largely subject to the state of competition within its industry.
Simple stuff, but this process happens in cycles; capital is attracted to higher returns and is withdrawn when returns fall. Critically, it is an approach to investing that focuses on supply conditions rather than expected but uncertain future demand.
So, as capital cycle investing came into prominence during the dotcom boom and bust, it is unsurprisingly making a comeback today.
And it is Django’s view that we are in the early phases of a new long-term capital cycle, and the world, as he sees it, has some huge valuation discrepancies to unwind. We had a fascinating chat.
In the Company of Mavericks