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HP Capital Cycle Hero

The Capital Cycle

“Over the long run, it is a company’s return on capital, not changes in quarterly earnings, which primarily determines the direction of its share price. The return on capital of any company is largely subject to the state of competition within its industry.”

Edward Chancellor, Capital Account

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Returns on capital lead share price movements, which often overshoot as markets extrapolate historic results.


Returns on capital tend to rise and fall in cycles, as capital is attracted to higher returns and is withdrawn when returns fall.


Barriers to entry can make it difficult for new capital to enter certain industries, which causes high returns on capital to persist.


In other industries there is a lack of a moat which results in returns remaining low.


Changes in any of these circumstances are likely to herald a shift in valuation.

At Hosking Partners, we use the capital cycle as the lens through which we view the world.


We take a step back, starting with an investigation of industries and their competitive dynamics, to assess where returns on capital are heading.


This means that we are long-term investors, thinking about supply - which we can broadly measure - more than demand - which is hard to predict beyond the short term.


We pay as much attention to a company’s balance sheet as to its income statement, and we try to understand the impact of our and others’ emotions on capital allocation and the behaviour of markets.


We are trying to find the signal through the noise.

As global generalists applying a capital cycle approach, we believe that being unconstrained in terms of where we invest means we have a genuine competitive advantage over our competitors, and an opportunity to be contrarian.


Our different time perspective should also allow us to be counter-cyclical.


If you would like to learn more about our capital cycle approach to investment, please get in touch using the link below.

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Capital Cycle diagram


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