I am currently reading Capital Returns, which features Marathon Asset Management’s investment memos (2002–2015). I am trying to understand how to practically apply the “Capital Cycle” framework to real-world investment thesis generation and not just discard as motivational theory.
The core idea is to identify where an industry stands in its capital cycle—specifically looking for supply-side shifts (consolidation vs. fragmentation) rather than just focusing on demand. I understand the theory, but I am struggling with the practical execution.
I would love some guidance on the following:
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Constructing the Cycle: How do you actually “chart” the capital cycle? Is it purely qualitative, or do you visualize specific data points (e.g., Capex/Sales, industry capacity additions) to spot if an industry is about to breakout (supply shortage) or enter a phase of mediocre returns (excess capital)?
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Metric Selection: How do you determine which supply-side metric is the “signal” for a specific industry?
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Example: For Banks, is it just credit growth vs. GDP, or something like GNPA cycle length?
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Example: For sectors like Recycling, Power, or IT, what are the supply constraints you track?
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Timeframe: How far back do you generally track these metrics to get a reliable signal? (5 years? 10 years? Full economic cycle?)
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Private vs. Public Supply: Public company capex is visible, but how do you gauge supply coming from unlisted/private players without expensive institutional tools? Are there reliable proxies or sources (e.g., ministry reports, credit rating reports)?
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Tools: Can this analysis be done effectively using free/retail tools (annual reports, screener, government data), or does it require paid databases?
I am looking to apply this specifically to sectors like Banking, Recycling, Power, and IT. Any examples of how you have successfully (or unsuccessfully) timed the capital cycle would be very helpful.
Thanks in advance!