Reading the capital cycle

The most reliable pattern we know is also the dullest. When an industry earns high returns, capital pours in. Capacity grows, competition sharpens, and returns fall, usually by more than anyone expected. When returns collapse, capital leaves, capacity is shut, and the survivors inherit a better world.

We count what's being built

So we spend a surprising amount of time counting things under construction. New factories. New entrants. New capacity that was announced last week. A sector everyone loves, where everyone is spending, is a sector whose returns are about to be competed away. A sector everyone has written off is where next decade's pricing power is being made.

This is unfashionable work. It means looking hardest at industries the market finds dull or distressed, and treating the booming ones with suspicion. The capital cycle has humbled more brilliant stories than we can count. We would rather count the capacity than argue with the story.

The views above are the firm's own and are provided for information only. They are not investment advice, nor an offer or solicitation to invest. Capital at risk; the value of investments can go down as well as up, and past performance is not a guide to future results.