When profits are high:
-Boost CAPEX with little regard for ROIC
-Competitors will follow suit to avoid losing market share
-CEO's incentives aren't aligned with shareholders
It's a race to the bottom.
Marathon Asset produced several iconic investors such as Nick Sleep and Jeremy Hosking.
Their letters from 2002 to 2015 provided a treasure trove of insights into their investment frameworks and how they look at the capital cycle.
Here are my main takeaways:
When profits are high:
-Boost CAPEX with little regard for ROIC
-Competitors will follow suit to avoid losing market share
-CEO's incentives aren't aligned with shareholders
It's a race to the bottom.
Forecasts that were reasonable will now look overly optimistic.
Profits collapse, management teams are changed, CAPEX is cut, and consolidation begins.
This will pave way for a recovery of profits.
Consider both asset growth at the company and industry level.
Avoid industries where assets are growing rapidly.
When overdone, investments that appear logical at first can become disastrous.
We have a tendency to forecast linearly when many things are cyclical.
Examples: trade cycles, credit cycles, etc
In making forecasts, investors and corporate managers are prone to be overconfident.
The overinvestment behavior is reinforced when many players in the industry do the same.
Supply is far less uncertain than demand.
Since most analysts focus on demand, stock markets rarely price in supply shocks.
When seeking growth, they look for businesses whose returns are more sustainable than what the market expects.
When seeking value, they look for companies whose improvement potential is generally underestimated.
In fact, a strong demand may destroy value as it triggers the industry to invest excessively.
When competition exits, it is when profitability and valuation start to rise.
It usually comes from:
-Oligopolistic market structure
- "Intrinsic" pricing power embedded in the product.
I.e. Branding of consumer products or mission-critical products.
I write about investment concepts, business breakdowns and growth philosophies.
Every week.
https://t.co/96pjE7aGBm
More from Thomas Chua
Having a finance degree did not make me a better investor.
Rather, I learned 10x more about investing from Twitter University.
🧵 Here are 5 threads from world-class Fintwitters.
What you learn: Build an investing checklist.
From: @BrianFeroldi, writer at Motley
What you learn: Read 10Ks like a Hedge Fund
From: @FabiusMercurius
What you learn: Perform a DCF analysis.
From: @10kdiver
What you learn: When to sell your stocks
From: @borrowed_ideas, founder at
Rather, I learned 10x more about investing from Twitter University.
🧵 Here are 5 threads from world-class Fintwitters.
What you learn: Build an investing checklist.
From: @BrianFeroldi, writer at Motley
1/ How to create an investment checklist (thread)
— Brian Feroldi (@BrianFeroldi) December 8, 2020
Checklists are an amazing, FREE, underutilized investing tool
Here's the step-by-step process for how to create your own
\u2b07\ufe0f\u2b07\ufe0f\u2b07\ufe0f\u2b07\ufe0f\u2b07\ufe0f\u2b07\ufe0f\u2b07\ufe0f\u2b07\ufe0f\u2b07\ufe0f
What you learn: Read 10Ks like a Hedge Fund
From: @FabiusMercurius
\U0001f9d0How to Read 10Ks Like a Hedge Fund\U0001f9d0
— Ming Zhao (@FabiusMercurius) May 7, 2021
\u201cFundamentals don\u2019t matter anymore!\u201d I\u2019ve heard this a lot lately on Fintwit.\U0001f644
But, for those who\u2019ve diversify beyond $GME and $DOGE, here\u2019s a primer on what metrics fundamental buy-side PMs look at and why:
(real examples outlined)
\U0001f447 pic.twitter.com/tLlNRvpnDK
What you learn: Perform a DCF analysis.
From: @10kdiver
1/
— 10-K Diver (@10kdiver) August 8, 2020
Get a cup of coffee.
In this thread, I'll show you how to do a DCF analysis.
For those unfamiliar, DCF = Discounted Cash Flow.
What you learn: When to sell your stocks
From: @borrowed_ideas, founder at
Buffett's letters taught me more about investing than any business school ever could.
Even after investing for 14 years, I uncover new insights every time I reread his letters.
Recently, I reread his letters from 1977 to 2020 for a third time.
Here are my key insights:
1. Moat is NEVER stagnant
A company's competitive position either grows stronger or weaker each day.
Widening the moat must always take precedence over short-term targets.
2. Commodity businesses
A business without moat will have its returns competed away.
Regardless of improvement, your competitors will quickly copy your advantage away.
Where returns on capital is dismal, reinvestment will only destroy value.
3. The flywheel effect
Buffett was preaching about the flywheel effect before it became cool.
Back then, newspapers were similar to today's platform businesses like Amazon, Meta, and App Store.
More readers beget more advertisers beget more readers.
4. Operating leverage
Companies with high fixed costs and low variable costs will see earnings rise faster than revenue.
However, it cuts both ways.
It becomes a disaster when revenue is declining.
Check out my article on how operating leverage works: https://t.co/Nv747oBAK0
Even after investing for 14 years, I uncover new insights every time I reread his letters.
Recently, I reread his letters from 1977 to 2020 for a third time.
Here are my key insights:
1. Moat is NEVER stagnant
A company's competitive position either grows stronger or weaker each day.
Widening the moat must always take precedence over short-term targets.
2. Commodity businesses
A business without moat will have its returns competed away.
Regardless of improvement, your competitors will quickly copy your advantage away.
Where returns on capital is dismal, reinvestment will only destroy value.
3. The flywheel effect
Buffett was preaching about the flywheel effect before it became cool.
Back then, newspapers were similar to today's platform businesses like Amazon, Meta, and App Store.
More readers beget more advertisers beget more readers.
4. Operating leverage
Companies with high fixed costs and low variable costs will see earnings rise faster than revenue.
However, it cuts both ways.
It becomes a disaster when revenue is declining.
Check out my article on how operating leverage works: https://t.co/Nv747oBAK0
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Athlete\u2019s body.
Artist\u2019s soul.
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When you choose who to follow on Twitter, you are choosing your future thoughts.
— James Clear (@JamesClear) October 3, 2020
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Working on a problem reduces the fear of it.
— James Clear (@JamesClear) August 30, 2020
It\u2019s hard to fear a problem when you are making progress on it\u2014even if progress is imperfect and slow.
Action relieves anxiety.
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We often avoid taking action because we think "I need to learn more," but the best way to learn is often by taking action.
— James Clear (@JamesClear) September 23, 2020