Capital Returns

With interest rates low and set to remain so, and banks prepared to prop up weak businesses for fear of crystallising losses, monetary policy looks very unlikely to precipitate a major reallocation of resources.

As bottom-up investors, however, we are more interested in the capital cycle as it affects individual companies than in aggregate corporate profitability.

A basic industry with few players, rational management, barriers to entry, a lack of exit barriers and non-complex rules of engagement is the perfect setting for companies to engage in cooperative behaviour.

more (in P/E terms) for the business with high returns on equity and superior cash flow generation.

so essential, in fact, that customers pay little attention to what they’re being charged.

discipline. With hindsight, our capital cycle approach has failed at times when we have underestimated the impact on industries of political and legal interference, disruptive technologies and globalisation.

when analyzing the prospects of both value and growth stocks, it is necessary to take into account asset growth, at both the company and the sectoral level.

Which makes us think that long-term investing works not because it is more difficult, but because there is less competition out there for the really valuable bits of information.

What we can say is that countries generally become more efficient in their use of raw materials as their economies develop, and so we should not be surprised to see the same thing happening gradually in China.