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

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.

During the US stock market bubble of the late 1990s, for instance, the investment share of GDP rose above average levels. After the bubble burst and the misallocation of capital of the boom years was revealed, both aggregate investment and profitability declined and the US economy went into recession.

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.

Importantly, these barriers often strengthen over time, as high returns on capital throw off abundant free cash flow which is in turn reinvested in the business.

The nine hundred breweries in China are partly the result of this provincial rivalry – indeed, in some parts of the country beer is cheaper than water.

Fast-growing companies with little or no profits and high valuations, such as Amazon, can still make good investments provided their industry’s supply side remains supportive.

High current profitability often leads to overconfidence among managers, who confuse benign industry conditions with their own skill – a mistake encouraged by the media, which is constantly looking for corporate heroes and villains.

There is evidence that investors’ discount rate increases when cash flows are further out – a phenomenon known as “hyperbolic discounting.” See, for example, Andrew Haldane, “The Short Long”, Bank of England (Speech May 2011)