Capital cycle analysis is really about how competitive advantage changes over time, viewed from an investor’s perspective.

Conversely, a focus on competitive conditions should alert investors to opportunities where supply conditions are benign and companies are able to maintain profitability for longer than the market expects. An understanding of competitive conditions and supply side dynamics also helps investors avoid value traps (such as US housing stocks in

•When policymakers interfere with the capital cycle, the market-clearing process may be arrested. New technologies can also disrupt the normal operation of the capital cycle.

In other words, capital cycle analysis was all about the drivers of mean reversion.

The ideal capital cycle opportunity for us has often been one in which a small number of large players evolve from a situation of excess competition and exert what is euphemistically called “pricing discipline.”

In recent years, capital cycle analysis has been more useful at picking stocks in companies which can maintain high returns than in finding opportunities among bombed-out industries recovering (or not) after a supply side restructuring.

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

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.

Internet has destroyed many long-established business models – in advertising (Yellow Pages), media (newspapers), retailing (bookshops), and entertainment (music industry and video rental). Investors who underestimated the disruptive impact of new technology have lost money.35 The capital cycle also ceases to function properly when policymakers