I reckon that the world’s invested capital is facing the wrong way. It has found itself overinvested in the US and its capital-light, digital masters of the universe, Mag Seven tech titans … BUT chronically it is underinvested in critical physical supply chains upon which much of our future national security depends. Our capital priorities have changed, and our understanding of risk is changing too.
So, I was delighted when I got the opportunity to catch up with Django Davidson, a partner and portfolio manager at Hosking Partners, who is a great advocate for the Capital Cycle Theory of Investing. This is an investment approach made famous in the 1990s and early 2000s by Marathon Asset Management and its ideological guru, the author Edward Chancellor.
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Simple stuff, but this process happens in cycles; capital is attracted to higher returns and is withdrawn when returns fall.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 on 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.
But as ever, none of what you are about to hear is any kind of advice, but just for your information and hopefully entertainment. Please take personal financial advice and do your own research before investing a penny of your money in these crazy markets.
With that said, please enjoy my conversation with Django Davidson.
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