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Capital Returns: Investing Through the Capital Cycle

We live in an age of serial asset bubbles and spectacular busts. Economists, policymakers, central bankers and most people in the financial world have been blindsided by these busts, while investors have lost trillions. Economists argue that bubbles can only be spotted after they burst and that market moves are unpredictable. Yet Marathon Asset Management, a London-based investment firm managing over $50 billion of assets has developed a relatively simple method for identifying and potentially avoiding them: follow the money, or rather the trail of investment. Bubbles whether they affect a whole economy or merely a single industry, tend to attract a splurge of capital spending. Excessive investment drives down returns and leads inexorably to a bust. This was the case with both the technology bubble at the turn of the century and the US housing bubble which followed shortly after. More recently, vast sums have been invested in mining and energy. From an investor's perspective, the trick is to avoid investing in sectors, or markets, where investment spending is unduly elevated and competition is fierce, and to put one's money to work where capital expenditure is depressed, competitive conditions are more favourable and, as a result, prospective investment returns are higher. This capital cycle strategy encourages investors to eschew the simple 'growth' and 'value' dichotomy and identify firms that can deliver superior returns either because capital has been taken out of an industry, or because the business has strong barriers to entry (what Warren Buffett refers to as a 'moat'). Some of Marathon's most successful investments have come from obscure, sometimes niche operations whose businesses are protected from the destructive forces of the capital cycle. Capital Returns is a comprehensive introduction to the theory and practical implementation of the capital cycle approach to investment. Edited and with an introduction by Edward Chancellor, the book brings together 60 of the most insightful reports written between 2002 and 2014 by Marathon portfolio managers. Capital Returns provides key insights into the capital cycle strategy, all supported with real life examples from global brewers to the semiconductor industry - showing how this approach can be usefully applied to different industry conditions and how, prior to 2008, it helped protect assets from financial catastrophe. This book will be a welcome reference for serious investors who looking to maximise portfolio returns over the long run.
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Table of Contents

Contents List Of Charts And Tables Foreword Editor '' ''s Note Introduction PART I: INVESTMENT PHILOSOPHY 1. Capital Cycle Revolution 1.1 Evolution Of Cooperation (February 2004) 1.2 Cod Philosophy (August 2004) 1.3 This Time '' ''s No Different (May 2006) 1.4 Supercycle Woes (May 2011) 1.5 No Small Beer (February 2010) 1.6 Oil Peak (February 2012) 1.7 Major Concerns (March 2014) 1.8 A Capital Cycle Revolution (March 2014) 1.9 Growth Paradox (September 2014) 2. Value In Growth 2.1 Warning Labels (September 2002) 2.2 Long Game (March 2003) 2.3 Double Agents (June 2004) 2.4 Digital Moats (August 2007) 2.5 Quality Time (August 2011) 2.6 Escaping The Semis '' '' Cycle (February 2013) 2.7 Research Enabler (March 2013) 2.8 Value In Growth (August 2013) 2.9 Quality Control (May 2014) 2.10 Under The Radar (February 2015) 3. Management Matters 3.1 Food For Thought (September 2003) 3.2 Meet The Management (March 2007) 3.3 Cyclical Misteps (August 2010) 3.4 A Capital Allocator (September 2010) 3.5 Northern Stars (March 2011) 3.6 Say On Pay (February 2012) 3.7 Happy Families (March 2012) 3.8 The Wit And Wisdom Of Johann Rupert (June 2013) 3.9a Meeting Of Minds (June 2014) 3.10 Culture Vulture (February 2015) PART II - BOOM, BUST, BOOM 4. Accidents-In-Waiting 4.1 Accidents-In-Waiting (2002-08) 4.2 The Builders '' '' Bank (May 2004) 4.3 Insecuritization (November 2002) 4.4 Carry On Private Equity (December 2004) 4.5 Blowing Bubbles (May 2006) 4.6 Pass The Parcel (February 2007) 4.7 Property Fiesta (February 2007) 4.8 Conduit Street (August 2007) 4.9 On The Rocks (September 2007) 4.10 Seven Deadly Sins (November 2009) 5. The Living Dead 5.1 Right To Buy (November 2008) 5.2 Spanish Deconstruction (November 2010) 5.3 Piigs Can Fly (November 2011) 5.4 Broken Banks (September 2012) 5.5 Twilight Zone (November 2012) 5.6 Capital Punishment (March 2013) 5.7 Living Dead (November 2013) 5.8 Relax, Mr Piketty (August 2014) 6. China Syndrome 6.1 Oriental Tricks (February 2003) 6.2 Dressed To Impress (November 2003) 6.3 Game Of Loans (March 2005) 6.4 What Lies Beneath (February 2014) 6.5 Value Traps (September 2014) 7. Inside The Mind Of Wall Street 7.1 A Complaint (December 2003) 7.2 Private Party (December 2005) 7.3 Christmas Cheer (December 2008) 7.4 Former Greedspin Boss Flees China (December 2010) 7.5 Occupy Bundestag (December 2011) 7.6 Season '' ''s Greetings (December 2012) 7.7 Lunch With The Gir (December 2013) 7.8 All Change (December 2014)

Promotional Information

'I read Capital Returns in one sitting. I wish this book had been available when I started in the business. One of the best books on investment I've ever read.' -Russell Napier, author of Anatomy of the Bear 'Capital Returns shows how excess investment drives mean reversion in the stock market. Investors who wish to understand bubbles should read this book.' -Jeremy Grantham, Founder and Chief Investment Strategist, Grantham, Mayo, van Otterloo 'Forget Warren Buffett. If you really want to know how markets work read this.' -Merryn Somerset-Webb, Editor, MoneyWeek 'Investors, fancying themselves capitalists, have long ignored the vital role of capital investment in driving investment success. This wonderful book may change that. Delve into its readable and informative even revelatory pages, and let the scales fall from your eyes.' -James Grant, Grant's Interest Rate Observer 'This book exemplifies the simple but sadly unrecognised idea that long term investment success depends on understanding business models.' John Kay, author of Other People's Money and the Kay Review of UK Equity Markets

About the Author

Edward Chancellor (editor and introduction) is the author of Devil Take the Hindmost: A History of Financial Speculation (FSG, 1999), a New York Times 'Notable Book of the Year' and editor of Marathon's previous book, Capital Account: A Money Manager's Reports on a Turbulent Decade (Thomson Texere, 2004). Mr. Chancellor is an award-winning financial journalist, who has written for the Financial Times, Wall Street Journal, Reuters and many other publications. He is a former member of the asset allocation team at GMO, a Boston-based investment firm. Marathon Asset Management (trading in the United States as Marathon-London) is an independent owner managed investment firm based in London. Founded in 1986, Marathon has successfully applied longer-term and often contrarian investment strategies around the globe.


"Capital Returns brings together industrial economics, Michael Porter's competitive analysis and behavioral finance, into a powerful long-term investment approach that Marathon Asset Management calls `capital cycle' analysis. ... This is one of the best investing books I've read. Highly recommended!" (Strictly Value,, January, 2016) "First, it covers an important and underappreciated subject, the capital cycle. Second, it contains a superb introduction by one of the great financial writers of our era, Edward Chancellor. ... Capital Returns explores an oft-neglected mechanism in the capital markets. It will prove profitable reading for any finance professional, and for the securities analyst, it is essential reading." (William J. Bernstein, CFA Institute Publications,, Vol. 11 (1), 2016)

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