This book contains stock investment strategies based on capital cycle analysis by global asset management company Marathon Asset Management.
We've compiled 60 of the most insightful reports written by Marathon's investment experts.
Edward Chancellor, who has a solid readership in Korea, edited it and even added a preface.
Investment insight comes from reading the 'flow of money'.
Money (capital) tends to flow into high-profit businesses.
Ironically, however, as money accumulates, profitability declines.
Then the money will be gone right away.
It only becomes visible when money is lost.
This is the true competitive advantage of the company that overcomes even difficulties.
In this cyclical process of capital circulation, the marathon discovers the 'answer' that investors have been searching for.
"Invest where capital is flowing out, the competitive landscape is improving, and the expected return on investment is therefore higher!" This is the proven, "numbers"-based, successful investment strategy of the marathon.

Marathon Asset Management LLP is soon celebrating its 30th anniversary.
While our investment philosophy has steadily evolved over time, two fundamental ideas about how capital markets work have remained unchanged.

The first thought is that 'high returns attract capital, and low returns attract capital.'
These inflows and outflows of capital often affect the competitive environment of an industry in predictable ways.
We would like to call this the capital cycle.
What we do is analyze the dynamics of these cycles.
In short, it's about figuring out when the capital cycle works and when it doesn't, and how you can use that to generate revenue for your customers.

Our second unchanging thought is that, in the long run, what is very important is the management's ability to allocate capital.
Finding a manager who allocates capital wisely is the most important step in successful stock selection.
The best managers understand the capital cycles that operate in their industry and don't get carried away during boom times.
--- pp.10-11, from “Preface”

The core of the "capital cycle" approach, as Marathon terms it, is understanding how changes in the quantity of capital used in an industry will affect future earnings.
In short, capital cycle analysis examines how changes in the supply side of a company's industry affect its competitiveness.

…
Ultimately, capital cycle analysis is an investor's perspective on how competitive advantage changes over time.

--- p.19, from “Editor’s Preface_Basic Concepts of Capital Cycle Analysis”

Even the massive raw materials supercycle has the hallmarks of a typical capital cycle.
In short, as profitability increases due to higher prices, investment increases and new entrants emerge based on overly optimistic demand forecasts.
Then, when demand falls short of expectations while supply increases, the cycle reverses.
--- p.31, from “Editor’s Preface_Basic Concepts of Capital Cycle Analysis”

The Marathon method is to find investment opportunities in both traditionally defined value and growth stocks.
These investment opportunities arise because the market often misperceives the rate at which returns revert to the mean.

We bet that 'value stocks' will see earnings rebound faster than the market expects, and that 'growth stocks' will see earnings stay high for longer than the market expects.
--- p.47, from “Editor’s Preface_Basic Concepts of Capital Cycle Analysis”

Capital cycle analysis, like value investing, requires patience.
It takes a long time for an industry's capital cycle to complete its cycle.
The NASDAQ began forming a bubble in 1995, but the dot-com bubble didn't burst until the spring of 2000.
--- p.52, from “Editor’s Preface_Basic Concepts of Capital Cycle Analysis”

Therefore, the core of capital cycle analysis can be summarized in the following arguments.
· Most investors spend more time understanding demand than supply.
However, demand is more difficult to predict than supply.

· Changes in supply determine the profitability of an industry.
Stock prices often fail to predict changes in the supply side.

· The dichotomy between value and growth is false.
Companies in industries that receive supply-side support may have higher valuations.

· Management's ability to allocate capital is crucial, and meetings with management often provide valuable insights.
--- p.54, from “Editor’s Preface_Basic Concepts of Capital Cycle Analysis”

Companies in the Marathon portfolio tend to have below-average price-to-earnings multiples, but this isn't because we intentionally sought out such "cigarette butts."

In fact, the companies included in our European portfolio are showing relatively strong earnings growth rates.
Part of the reason our portfolio companies have such a contradictory mix of low price-to-earnings ratios and strong earnings growth is that small caps often offer above-average growth prospects but are still cheap.

--- p.116, from “Chapter 2_Value in Growth”

We believe that stocks should not be viewed solely based on "growth" or "value," but rather on whether the market is effectively assessing the company's future earnings prospects.

--- p.120, from “Chapter 2: Value in Growth”

Someday Galbraith (JK
Galbraith once quipped, “There is nothing in politics as good as a short-term memory,” but crude thinking like “short-term memory” is not unique to politics.

We believe long-term investing is more effective not because it's more difficult, but because there's less competition for truly valuable information.

--- pp.124-125, from “Chapter 2: Value in Growth”

Bottom-up investors like us, who focus on analyzing the fundamentals of individual companies, are more interested in the capital cycle than in the profitability of the entire company, because the capital cycle affects individual companies.

We are looking for factors that could improve ROE, particularly: (1) the emergence of oligopolies in industries previously characterized by low profitability and excessive competition; (2) the development of business models with already high and increasingly high barriers to entry; and (3) management actions that facilitate these trends.

--- p.134, from “Chapter 2_Value in Growth”

The history of the semiconductor industry is a representative example of the capital cycle.
However, some companies in 'niche markets' are an exception.
These companies have avoided disruptive capital cycles and are delivering excellent long-term returns to shareholders.

--- p.138, from “Chapter 2: Value in Growth”

Like many other investors, we love to quote Warren Buffett.
One special saying from this Omaha sage has become a sort of motto for the marathon.
That is, “After 10 years of service, the CEO of a company with retained earnings equal to 10% of net assets is responsible for allocating at least 60% of the total capital used in the business.”

What this means is that investors should pay particular attention to management's capital allocation skills.
--- p.162, from “Chapter 3: Management is Important”

In a letter to customers in September 2000, Marathon warned, “The next glut will be worse than the last.
“If we can’t punish the big investment banks—they’re too big and too intertwined to fail—despite their greed and mistakes, it’s only a matter of time before they challenge the system itself,” he predicted.
Unfortunately, this dark prediction came true eight years later when Lehman Brothers went bankrupt.

--- pp.372-373, from “Chapter 7_The Secret Minds of Wall Street”