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.

Rational investors are unable to impose their views on the market as the capital cycle poses a number of “limits to arbitrage.”

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.

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.

out, the “value/growth dichotomy” is false – at least, to a true value investor, whose aim is not to buy stocks which are “cheap” on accounting measures (P/E, price-to-book, etc.) and to avoid those which are expensive on the same basis, but rather to look for investments trading at low prices relative to the investor’s estimate of their intrinsic

With regards to the workings of the capital cycle, investors focus on current (and projected) future profitability but ignore changes in the industry’s asset base from which returns are generated.

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.

When it comes to investment analysis, looking for relevant historical parallels (e.g., comparing the US real estate boom of the 2000s to the Japanese real estate market in the 1980s)

While the case for long-term investment has tended to centre around simple mathematical advantages such as reduced (frictional) costs and fewer decisions leading (hopefully) to fewer mistakes, the real advantage to this approach, in our opinion, comes from asking more valuable questions.