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Investing Through The Capital Cycle And a Warning For AI Stocks? (Marathon Asset Management)
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- [00:00]
Ryan Henderson
This episode is presented by Interactive brokers. Will the U.S. consumer Confidence Index be above 101 in March 2026? Turn your view into a trade with IBKR Forecast Trader and earn a dollar per contract. If you're right@ibkr.com forecast last trading day is March 22nd. More on this later in the episode.
- [00:24]
Brett Shafer
Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now.
- [00:43]
Podcast Host / Narrator
Please enjoy this episode welcome into the Chit Chat Stocks Podcast, a podcast to help you find your next great investment Today we have another super investor overview that we are talking about today. It's not necessarily a single investor, but it is a philosophy built by Marathon Asset Management, a London based investment firm that has been around for decades. Almost actually they're about to hit their 40th anniversary this year and they've been around for so long despite internal conflicts, despite huge changes in the market environment, some countries doing better, some sectors doing better because they have a frugal analysis of the business cycle. They've written two books chronicling their investment philosophy over the years. Ryan read one of the books, I read the other. In preparation for this podcast we were going to cover what we learned, their current investments a little bit. It's tough to kind of get their full portfolio and we can also for everyone you know, try to apply lessons to today's market. And as a as a tease, I think these lessons can apply very well and are aptly put to discuss the current boom in AI infrastructure, although it can be talked about with any technology cycle and really any industry. Now before we begin, let's remind listeners give us a five star review on Apple or Spotify. If you haven't Apple Podcasts or Spotify, follow the show wherever you get your podcast. We don't care if it's you, YouTube, Spotify, Apple podcast, or the small tiny podcast player that you like and don't want to use. The big guys make sure to spread the good word and subscribe to our newsletter Emerging Moat Stock Research in the show notes Ryan I'm going to get into the background of Marathon Asset Management. I just want to ask before did you know about this firm at all? Did you have any idea about them and maybe give a little tease of what you thought reading a lot of their work and covering what they do?
- [02:46]
Ryan Henderson
No No, I didn't know much about Marathon Asset Management. And just for anyone that looks them up after the show or is interested in them, there are two separate ones, I believe, so there's Marathon Asset Management London and Marathon Asset Management New York, which I think is like a debt, primarily invests in fixed income New York.
- [03:11]
Podcast Host / Narrator
We're not related. Yeah. Right.
- [03:13]
Ryan Henderson
We are focused on the London firm who wrote these books. And I had heard of the book, but I hadn't heard of the company. And a lot of the lessons. It's really, it's always interesting reading an investing book that was written 10, 20 years ago because especially if they use specific company analogies or lessons from those companies because obviously now, having lived over the last, you know, the, the following two decades, you know how the results turned out for those companies. And it's amazing how many of their takeaways, not all of them, but most of them, ended up being sort of timeless. Like a lot of the same lessons still apply. We still see a lot of the same critiques, a lot of the same. I guess maybe dishonest. Yes. And I was going to say dishonest activity out of Wall street as well.
- [04:05]
Podcast Host / Narrator
Yes.
- [04:06]
Ryan Henderson
But some of the companies they mentioned ended up, you know, the durable aspects of the business that they talked about ended up persisting for decades beyond which kind of shows that they kind of knew what they were talking about when they studied these businesses initially.
- [04:25]
Podcast Host / Narrator
Yep. And just for maybe a brief overview, their philosophy is maybe a different way to go about and find companies, companies with moats, maybe different from Buffett, where instead of looking at the business quality itself, they start out with the actual sector overview and the capital intensity of the industry. It's on the opposite end of the spectrum from the Motley fool, the David Gardeners, the Tom Gardeners of the world, which we enjoy. We have those type of stocks in our portfolio as well. But I think this is another good lesson, especially I learned a lot from studying this investment firm, especially in a time like now where we're seeing, and we're going to talk about this at the end of the episode, kind of given our debrief of what we think about with current times, we're seeing one of the biggest infrastructure and capital cycles maybe ever, in nominal dollars for sure. But let's, let's get to the. Not the company, the investment firm itself. Marathon Asset Management was founded in 1986 and it has grown into an investment fund with tens of billions in 81 today. But we cannot confirm what their audited results have been since Inception the sourcing I found says that they return have returned around 10% per year since 1986 through the mid 2010s. Now I think ah, just 10% per year but that remember 1986, 1987 was kind of a peak in market valuations in the early 2010s. Mid 2010s was kind of a trough. So this is not going from 82 to 2021 where you can get some nominal returns that look quite fantastic over that time period. But if you look at their relative performance, they have bested the World index by approximately 5% per year. They use the MIC MSCI World Index which we can discuss whether or not that's the right benchmark. I think it should be noted that they are in London. They probably do not have a full US investor base and the S&P 500 benchmark might not be fully appropriate. But I think, and we don't need to talk allocators don't need to know this but when you compare to an index you better make sure that your you know the holdings you have and I think it is true that they have full kind of international coverage. But the holdings you have aren't just focused on a single country where you compare to the world index. But 80% of our holdings are from the United States. Well, you know, you might underperform the S&P 500 but outperformed the MSCI World Index. Marathon was founded by three people. Neil Oster, hopefully I'm pronouncing your name right. William Ara and Jeremy Hoskins. Hoskins investing philosophy was formed after he was put in charge of a busted growth fund in 1982 which had a bunch of hot leftover debris as he called it, from the personal computing boom. Here's a quote that he had from the Book Capital account which is the one I read that covers kind of the early 90s to the dot com bust period. He said quote this experience led me to think about the central cause of the bust. The source of the many disappointments could be traced to the boom itself. Now for the first time in history, investors had been overexcited about the prospects of a new technology. New technologies don't always make good investments. Indeed, I came to the conclusion that from the perspective of an investor there was very little difference between the manufacturer of computer chips and the producer of breakfast corn flakes. Over the long run, share prices are determined by cash flows. Now he wrote this again. I know computer chips are the most popular sector in 2026, maybe the entire market. But he wrote this, I believe in 2002, 2003, right in the dot com bus. And this in turn kind of his formative years. I'm sure the two other people as well. It led to the foundation of what we're going to be talking about for the bulk of this episode, which is the capital psycho theory, which guided the investment firm throughout the years. Really, both books hit on this, both kind of hit separate case studies. I'll talk about it a bit. Ryan can talk about his views as well. And just for, you know, a little brief history, what happened with the firm. Hoskin is the man behind the client letters which are heavily critical of corporate management practices and Wall street analysts. It sounds honestly right up our alley, the emergence of kind of hitting the number and all that stuff in the 90s, I'm sure for someone that, you know, is older, is from the 70s and 80s when he was just. And he started seeing all this similar to Buffett, similar to Munger, similar to a lot of people from that time. They see what happened with CNBC earnings per share targets, quarterly numbers and just were appalled by what happened now. They also applied their strategy to emerging markets, which is led by the other two. And while we will not cover this in detail today, apparently there was a lot of conflict when Hoskins decided to leave in 2012. They were almost running two separate funds within Marathon at this point. And he secretly at the time, held meetings with Marathon employees to bring them to a new firm that he was starting. I think they actually went to court and legally he didn't do anything that he had to pay a fine for. But, you know, might have been a bit unethical to do that. Oster and Ara, hopefully, again I'm pronouncing that right, they retain control of Marathon today. And even with these legal disputes that happened, Hoskin launched Hosking Partners, which has billions in aum as of this moment. I think they're still operating right now. There, you know, are always egos in the investment world, especially among fund managers. And estimates say that Hosking Partners has done quite well, even though they have close to zero weight to big tech and popular industries. And they've invested in things like financials and mining in emerging markets or in undervalued economies like Japan. Again, there's a lot of ways to skin the cat in the investing world. You can go for the heavy hitters like the Motley fool type style, as we mentioned, the other side of the investing spectrum, or you can try to find the under discovered stuff maybe at the bottom of the capital cycle, as they discussed throughout all their letters. And as a last note, I know there's a lot of people that love Nick Sleep and the Nomad Investment Partnership. This is where he actually started his work. And the Nomad Investment Partnership was initially a part of Marathon Asset Management. I think we covered that briefly in our episode on Nick Sleep and the Nomad Investment Partnership, but I didn't make that connection until I actually found that within my research. Lastly, before we get into the actual beef of the book, we don't necessarily care about the story of the firm, but whether the strategy can produce solid returns for us, whether listeners can learn about maybe a different way to invest, get better as an investor. As we go throughout this episode and over the decades, really, it looks like it can. It's not going to be something that's going to produce a thousand beggar, but it's going to produce steady results through the market cycle. And we're going to try to explore with some case studies whether, you know, try to learn about this philosophy yourself. So, Ryan, I'll give myself a break before I get into the first book here. What do you think about the firm, the history and anything along those lines?
- [11:08]
Ryan Henderson
Yeah, it isn't the absolute best performance we've ever seen out of the investors we've studied, but they did it for a long time. You mentioned was it 86 through the mid 2010s? If you generate compounded 10% a year, you're going to do really well on behalf of investors. There is. And we'll get into the book. I do sometimes think firms, especially bigger firms set up like almost care too much about their frameworks and like fitting within certain frameworks. And we're going to talk a lot about the capital cycle here. And I mean they've written two books on it. So it goes to show you how much they care about their mental frameworks. But there are times when they it doesn't have to be specifically within their criteria. There are investments that they've made that basically don't abide by any capital cycle theory. Well, I guess it's a workaround. I'll describe that in my section. But they as rigid as it might seem when you read their books, because it talks a lot about like understanding the industry and where the industry is at. They did show a lot of flexibility when you actually study their holdings. So I'm impressed by the company. Obviously a lot of really bright investors have come out of there, Nick Sleep included, and they did really well For a long time. Kind of a weird falling out. But as you said, egos usually are involved in the investing world.
- [12:40]
Podcast Host / Narrator
Exactly, exactly. And again people, especially while we're the meat of a bull market, they might Scoff at the 10% returns. I think you have to understand that sometimes an investment firm is marketing a spec strategy to be a piece of institutional allocators where instead of someone like again, we're going to use the Molly fool as kind of a prime example with the growth side of the spectrum. You know, those type of strategies, while if run smartly can produce solid returns over the long term, they can also experience very severe drawdowns where this one, if you're more, you know, it's not going to have as much upside. But sometimes that 10% return that's a lot more reliable is something that's one easier to market as an investment fund if you have a specific style that you can pitch to allocators instead of look, we're good. You can't really just say that unless you're someone with the track record like Buffett or repeater lynch or something like that. But it's also again, sometimes investors or allocators aren't necessarily looking for just total outperformance over the long haul. They want that steady durability. But yeah, let's get into the capital account book. So this covers the 1993-2002 period. It kind of goes through the founding story and I can really just start things out with what they talked about with capital Psychotherapy is in the book because I think investors are looking at or any listeners are like, well what exactly does this even mean? So here's the quote. Our capital psycho theory, the idea that the prospect of high returns will attract excess competition has been reinforced over the years with the observation that investment bankers spend their lives flogging the latest investment fashion. As you can see here, they're not the biggest fans of the investment banking community. Again and again, however, we have seen that what is hot in the investment world today generally turns cold, deathly cold in the non too distant future. Years of implementing capital cycle analysis have also led us to appreciate more deeply the role that management plays in delivering shareholder returns. The response of management to the forces of the capital cycle in particular, whether they curtail investment or returns have been poor, has become a particular focus of our attention. So here's it's kind of a four part repeating cycle and we have maybe, I don't know, anyone watching the video will be able to see it, but it's Essentially a circular. You can look up the chart online. It starts out with one part. Part one. New entrants are attracted by prospect of high returns. Investors are optimistic. This leads to rising competition because returns are great, you have more competitors showing up. And then returns because there's more supply and demand, you know, it grows faster than demand. Then returns fall below the cost of capital, your return on investment capital decreases. And then second, business and investment bank, or excuse me, business investment starts to decline, so supply decreases. There's industry consolidation, firms exit and investors get very, very pessimistic. And this leads to the fourth part, improving supply side conditions cause returns to rise above the cost of capital, which leads to share price outperformance. And then you get back to step one. New entrants are attracted by prospect of high returns. So they want to invest in a company or a stock where they were at the bottom of the capital cycle, where returns look bad today. There's industry consolidation, supply is decreasing. But as they know, and as you can study throughout history, that is going to lead to some better numbers in the future, even if the last year's financials don't look that great. And one topic they covered in the book is the evolution of the earnings report which Marathon witnessed firsthand from the late 80s through the dot com bubble. It was an accumulation of six things. I think they, they summarize. One, companies focusing on earnings per share, otherwise known as quote the number. This has really changed. I mean nowadays for anyone starting out like us, we go, oh, everyone hit their earnings per share target. And at first you go, okay, they hit their number. But as we've learned about the last few years of trying to become better investors, the number is not, it doesn't matter. I actually don't know what any of the earnings per shares of the company's own because it's not going to affect long term returns. Second is the analyst coverage of the number. They focus intensely on it, the incentives are there and the earnings per share estimates for each quarter. Third quarter. Companies purposely putting up guidance and guiding below what they think they can hit, which is a sandbag, thereby setting up the capability to quote, beat every quarter. My eyes are rolling just thinking about this. So much wasted energy going into this. And if you look at their book, they had an example of apparently, and you know, this is a good company, it's one that's been one of the best performers ever. But Microsoft met or beat expectations for 39 straight quarters. It's just, it doesn't matter. People care about this. They Want that earnings pop. And then fourth you have the rise of CNBC turning the quarterly number into entertainment. I mean, now we have the Internet, we have people like us that are part of the entertainment of the investing world. And you have five executive teams using accounting tricks to massage earnings, which happens up until this day. But it was probably more prevalent before, I believe Sarbanes, Oxley and some of the other SEC stuff coming out of the dot com boom. But it still happens. They want to massage earnings, they want to do accounting tricks. And then there's the slow acceptance of adjusted earnings figures. So now we have just every company going, well, our adjusted EBITDA just great. Okay, well, I don't really care about that now. Marathon believed and probably still believes that this has highly and deeply corrupted management teams. As they will say time and time again, excuse me, it is a return on capital deployed or for any beginner listening to this, what you get in return for money spent on new projects essentially. All right, I got a business. We have a balance sheet that we haven't done anything with yet. We have $10 million. We're going to spend this $10 million. Well, how much in profit are we going to get from this spending and how much are we going to actually spend? Are we going to return some capital to shareholders? And that is going to what that is going to be what determines stock price performance over the long haul, not whether a company can hit a quarterly earnings target. I'll go through another case study of the telecom bubble, Ryan, but anything you want to add for the basic capital cycle theory? Will the US consumer confidence index be above 101 in March 2026? At IBKR forecast trader, the yes recently priced at 40% and the no at 58%. But markets move fast. Forecast contracts let you turn your views into trades on future events like the economy, climate change and politics with simple yes or no prediction style contracts. Explore trending data and spot the trends. And if you get your prediction right, you earn $1 per contract at settlement plus you'll earn 3.14% APY on your investment with an interest like incentive coupon. 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- [19:51]
Ryan Henderson
Yeah, just to kind of summarize what you just laid out there. Basically sort of the entire crux of Marathon's investment Belief or investment process revolves around the capital cycle in that when you have an attractive business that earns high returns on capital, it attracts competition. Competition lowers the returns. When the returns lower, you can find good investments out of that, and the few that emerge can kind of go on and generate good returns. That's sort of the gist of the overall capital cycle. I know you just laid that out, but for anyone who needed repeating. Yes, that, that's, that's the basics. And there's also, I'll talk about in our, in the second book, Capital Returns, which is kind of a perfect name, honestly. It's the same gist, it's the same philosophy that they wrote about in the second book. So I'm not going to repeat that part. It would have been fun to be an investor and watch the evolution of earnings reports change through like the 80s and 90s. And yeah, now you see it with just like chronic adjusted numbers. It is, it's so true. Like, do you really care that much about a single quarter's earnings per share figure? Most of the investors, mostly great investors, I don't think they give any time to the quarterly earnings per share figure. They more so care about what's going to happen in two or three years. Let's go through some of the examples of industry cycles and some of the booms and busts. I see you've got the telecom bubble as your first one. You want to talk through that?
- [21:38]
Podcast Host / Narrator
Sure. So in capital count covers, really, they produced it right when the telecom bubble busted and is in this period that investors, they were placing huge premiums on capital deployed to the telecom buildup because of the rise of the Internet and, you know, other things like cable tv, they could see a huge opportunity ahead of themselves. Here's a quote from the book. When a hole in the ground costs $1 to dig, but is priced in the stock market at $10, the temptation to reach for a shovel becomes irresist, irresistible. It was widely believed in the mid-90s that $1 invested in new telecom equipment would generate an incremental dollar of sales. This created an incentive for new firms to enter the telecom market after its deregulation in 1996. Apparently $500 billion was estimated to be spent by dozens of telecom companies during the boom. And this is a key part of the capital cycle theory, which for them, they want to track supply demand is hard to tell. It's like, oh, well, how many people are going to be using the Internet in 2003? Probably more, but how many more? But they can track Supply because that's what companies are spending today. And if there's runaway spending, supply almost always gets ahead of itself because of the incentives from management teams. Because they see the high returns today and nothing core like you don't see the returns deteriorate overnight. So eventually it leads to a bust in the seven time and time and time again. And the reason they care about supply is because it's much easier again to track. It's less inherently unpredictable according to them. Quote from the book the behavior of the professional investment community during this period was not much better than that of investment bankers. Many fund managers projected their own business interest at the expense of all of their clients long term interest at the time they purchased shares in the booming telecon companies, not necessarily because they believed in their brilliant prospects, but possibly because failure to own these stocks would have caused them to underperform the benchmark index. These fund managers feared with some justification that even temporary underperformance might lead clients to withdraw funds or that they might face the sack. And there's the British coming out in them. In addition, real retail investment firms found it lucrative at the time to sell Internet and technology funds to the public. So again, this is kind of the I forget who has the saying, but it's like the when the ducks are quacking, you gotta feed them, you know, everyone. There's just an incentive for everyone playing in a boom to get be a part of it. You don't want to be felt like you're leaving behind. Investors are attracted to the hot stocks of the day and it really is another way to look at competitive advantages. But coming at it from a different angle of Buffett's way of investing. Simply if competition is declining, which means you probably have the only ones that are going to stick around are the ones with the scale, the competitive advantage, the branding, the ip. Whatever competitive advantage you have, you are going to start seeing increased returns. And when the opposite of true is true, when competition is increasing, your moat is decreasing, returns are going to be terrible. And they look at things from a dollar deployed perspective, not just the numbers of competitors. So for example, I think this is one easy to understand for any listener here. Even if you don't have much experience investing, if you have a town of 25,000 people, maybe it grows to 30,000. You have 10 restaurants in the town, in the downtown area. Suddenly because returns are great, because the population is growing, 10 more pop up, you have double the amount of restaurants overnight, which is going to destroy the return per restaurant because there's Maybe they're all equal, you know, maybe one is better food. But for all 20 restaurants, your returns are going to be poor because there's going to be less traffic. You only have so many people, many are going to go bankrupt. But maybe five end up surviving. But then if you only have five, sorry for the siren in the background, everyone. Profitability will increase and the cycle starts all over again. What do you think about that, Ryan? And I guess the telecom bubble as an example. Any lessons to learn from that for you?
- [25:30]
Ryan Henderson
No. Well, we've studied it before and looked at it, and I do think that analogy is. Or that quote that you've got there of when a hole in the ground costs a dollar to dig, but it's priced in the stock market at $10, it goes to show you how tempting the reinvestment is for a lot of these cycles. And he talks a lot about semiconductors, at least in my book. And you see it all the time where it's. And that that's probably just the most pronounced one that has gone through these big booms and busts. But it's so enticing if you're a manager or a CEO of a business that's.
- [26:13]
Podcast Host / Narrator
Even.
- [26:14]
Ryan Henderson
Even if you know you're in a cyclical industry, there's a. You're generating good returns at the moment on the capital you're deploying. So it's hard to stop and say, no, no, no, I'm going to turn that off, I'm going to stop investing. The other part is it is sort of Prisoner's dilemma, where if you've got three big competitors, and I'm simplifying this because a lot of the industries have tons of competitors, but let's say there are four competitors in one market and they make up the whole thing. It's prisoner's dilemma, because are you all going to sit there and say, no, we're not going to invest, we're not going to reinvest, and it just takes one company to say, all right, fine, we'll go get that excess demand, we'll go service that, we'll invest for it, and then every other company has to do it. You can't just let that competitor out, earn you, or go after the market. It's so hard to sit back and say, we're going to let the cycle play out, even if ultimately in some of these industries, that's the right thing to do.
- [27:15]
Podcast Host / Narrator
Yeah. And that comes, you know, it's a good lead into another example they have. And this is a positive one of Management teams that can manage the capital cycle. Well, I mean, that's your whole point. That's what you're supposed to be doing as a executive. An example that I give is General Dynamics. It came out of the post Cold War era in the 90s and this is a time when spending on defense collapsed for the United States at least a lot of the defense contractors struggled. There was consolidation in the space and returns look poor previously. But when they saw General Dynamics, they had this investing framework where essentially they said, if we have a strong position in industry, we're going to invest in it. And then all the way down to if we have a weak competitive position and we're a leader in the space or not a leader in the space, were going to exit that industry. So they, you know, had a rational way to approach the post Cold War defense contracting era. Share price ended up going sixfold in just a few years when they focused on the areas that they could actually earn good returns on capital invested and your ROIC greatly increased. Now or maybe the last thing I'll have from the book that I thought was interesting is because, and I think this relates time and time again, it's never going to change as long as humans. Maybe if, maybe if AI starts running companies, this will change. But they essentially talk about how management's. I'll just read the quote. Unfortunately, we find that most companies are their happiest when they are getting bigger, regardless of the implications for their investment returns. And in particular, companies which realize they are operating in an increasingly hostile environment often respond to spending more rather than less. Investors and analysts are slow to pick up on this value destruction because they focus excessively on short term operating numbers. You know, revenue's growing, all right, it's great, everything's a party. Until they start paying attention to the long term strategies that determine future earnings. The misallocation of capital by management will continue and shareholders will end up disappointed. I think the tech companies are good examples of this where generally the big tech companies have like a core business that's so profitable underlying that it makes up for a lot of experiments. But they tend to want to go after every everything. Amazon and Meta are huge culprits of this. Where Amazon goes, wow, we have this new cool technology, let's go after it. Well, are you a leader in the space? No. Well, why are you spending all this money on meta platforms with all the stuff that Zuckerberg wants to do that, you know, maybe it'll work out, but I think generally marathon capital would not be investing in this. And I guess the question that popped up for me, does this vindicate how Apple operates, especially their AI strategy, focusing on just a few things? I mean, I feel like Apple's a good example of this, of a good management team. But Eddie, for you, Ryan, like current examples of good managers in this regard, bad managers, I think we're going to go the most popular companies, I say the bad ones would be the Amazon and Meta philosophy and a good one. Another good one that comes to mind besides Apple would be Netflix.
- [30:14]
Ryan Henderson
Yeah, it's. I don't know if I have any particularly good single examples of Indus or of companies where the management team has exuded capital discipline in a booming space, but they're one of the themes that he talks about in the second book is cooperative industries. Ones where it's like an oligopoly or maybe two or three players that dominate and they know basically not to go and be aggressive with like price drops or, or trying to gain market share. They kind of work. It's almost like frenemies in a way where rational competition.
- [30:57]
Podcast Host / Narrator
It's like Pepsi.
- [30:59]
Ryan Henderson
Yeah. Or like O'Reilly and Autozone, like, you know, the. I think that's kind of one analogy. Home Depot and Lowe's, maybe. Although those can be a little more aggressive towards one another. Apple, I think it does. Does anyone use their iPhone less? Because there currently isn't AI features. Maybe they use Siri less. But I think the fact that they focus so much on their core product. I'm okay. I would be okay with that as a shareholder.
- [31:31]
Podcast Host / Narrator
All right, let's talk about your book, Capital Returns. This goes from 2004 onward, kind of moving and inching our way toward modern times. We're going to talk about this. I'll let you go through what you learned from that book and if you have any questions for myself or need a break from the monologuing, please let me know and then we'll go through their portfolio and we'll close out the podcast with lessons learned. So, Ryan, what did you learn from reading Capital Returns?
- [31:56]
Ryan Henderson
Yeah, so this book covered basically 2004 to around 2014 time period maybe. I think 2014 was sort of the furthest they got, but the bulk of the lessons they didn't change too much from Capital account. It was very similar in terms of the capital cycle theory, but some of the stories and the specific cycles did change. So a couple things I'll just mention before I get into some of the specific cycles. It I, I already kind of said this, but it's so it's often hard in real time to recognize when the spending is excessive because everyone talks about the demand like we're seeing it with AI.
- [32:41]
Podcast Host / Narrator
Right.
- [32:41]
Ryan Henderson
Like it's so easy to justify spending because everyone talks about how much demand there is. And that's why these booms start every single time. Like I'm going to talk about the copper cycle BO 2003, 2005, that time period, everyone believed that China growing as an economy was going to just be a massive boom for copper. And it's such an e. Like there's always something to cling to on the demand side that for the management teams it validates the spend even if you can't see the returns right away or even if you're concerned that maybe it's getting competitive. So it's. That's just to say this isn't some lesson from the past that's never going to happen again. I think this is probably happening now in certain industries and is going to happen over and over again. Okay, let's talk about some of the cycles. Copper cycle of 2003-2005. One thing I picked up on reading this book is I see this all the time. It's so easy to make the case that this time is different. Like when you're in sort of a cyclical boom. And oftentimes the reason people say it is they talk about supply constraints. We had a recent power hour and one of our listeners mentioned how hard it is to start a mine, like to get a mining operation going away. I think we were talking about silver. The price of silver had ballooned and I was like, well, there's, you know, it's a commodity. Eventually price will come back down. And people were in the comments saying, well, it's hard to set up a mine. It's going to take time. Those bottlenecks usually subside over time. So here's a quote that I found that was basically addressing this exact thing. So it says commodity bulls attribute high prices to supply shortages and argue that higher prices are needed as an incentive to invest in production. All the same, one can be sure that additional supply will be forthcoming at some point. Indeed, mining companies have certainly responded to the pricing situation in the way that one would expect. Initially, they were skeptical of the price rises, but later they started investing heavily to bring on new supply. Mining exploration costs doubled between 2003 and 2005. Much of this additional spending is a consequence of having to absorb higher production costs, but not all of it. Indeed, some mining companies believe that there is enough supply coming on stream in copper for there to be a sizable market surplus in a couple of years. Time supply bottlenecks do not last forever. We see this all the time. And it's the reason why people still get bullish even when commodity we're talking about silver and gold right now. I think both of them are up 100% over the last year.
- [35:35]
Podcast Host / Narrator
Correct.
- [35:35]
Ryan Henderson
Maybe it was depressed for a long time, but I immediately asked, I asked AI, I was like, what if you had to make a case for why silver and gold will continue to see prices soar? What would be the reason? And the first thing was they have a structural supply shortage. I think it's very, very rare for something to not be for a bottleneck to last forever. More often than not either a government will get involved. They'll permit more companies if the capital's there to be earned. I think the bottleneck will eventually subside. Moving to some more like specific investments that Marathon made. There are they basically identify two types of investments that they typically look for. And this is I think maybe the one of the most important takeaways from this episode. If listeners have been tuning out for any reason, listen to this part because this is how they invest and it's how they try to identify companies. Marathon looks to invest in two phases of an industry's capital cycle from what is misleadingly labeled the growth universe. We search for businesses whose high returns are believed to be more sustainable than investors expect. Here the good company manages to resist becoming a mediocre one from the low return or value universe. Our aim is to find companies who whose improvement potential is generally underestimated. So it isn't. Brett talked about sort of that circle of the capital cycle where it's earning good returns entices competition, returns go down and then kind of clears out the companies. They invest on both sides. So if there's a company that's earning good returns but they think that company can continue to do it for longer than analysts expect, they're not going to avoid companies like that. And then on the bottom of the cycle that's sort of their bread and butter, I think where it's value companies trough earnings competition starting to diminish because returns have been so poor for a few years. And there's there's two examples of that that I'll go through. Any any thoughts there, Brett?
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Brett Shafer
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- [38:50]
Podcast Host / Narrator
think with those low, you know, the value universe ones, I think they're probably looking at mining commodities, stuff like that, where it's really clear cut. I mean we could have seen it in the last few years with the oil industry. You have, you know, the price of oil going down. There's consolidation in the shale space. I mean you can even look at the last decade within shale in the United States. It followed the same thing, the boom in the 2013, 2015 period. And then there was such a huge amount of supply that came online. There's so much capital going out and not caring about the returns. Well, we've seen consolidation and maybe, you know, the last few years has been a good time to invest with a long term time horizon on that. But when you look at the growth stuff, that might be more of what relates to the Buffett investments, the Peter lynch investments, the motley Fugal type investments where you look at something, for example an Nvidia and if you believe or you have high confidence that they have a protective competitive advantage, well, they'll have the sustainable returns through the market cycle regardless of what happens to the competition. All right, let's go through an example that we've actually covered recently. So relates well, beer, maybe, maybe this is the time to invest because again, we're seeing supply decrease and demand decrease at the same time.
- [40:04]
Ryan Henderson
Yeah, so this is sort of the bottom of the cycle example and this was sort of the Beer consolidation that happened pretty much throughout the 2000s. So this very much falls into the fine companies whose improvement potential is underestimated so between 2000 and 2010, I guess prior to basically the 2000s, mid 2000s, beer was hyper competitive. It was a massive industry. There were a lot of players, a lot of them operated in tons of different geographies. So it's not like you only had regional players there. And this created pretty much poor returns across the board, or at least lackluster returns for most beer companies. However, Starting in the 2000s, we started to see massive consolidation. So in 2002, South African brewer SAB bought Miller. 2004, Ambev and Interbrew merged. In 2007, SAB Miller and Molson Coors formed a joint venture. In 2008, Imbev completed a $52 billion hostile takeover of Anheuser Busch. Again in 2008, Heineken teamed up with Carlsberg and acquired Scottish and Newcastle, which was I think the UK's largest brewer. And then in 2010, Heineken acquired the beer operations of FEMSA, which owns like Dosakis and those brands. And then shortly after that, Constellation and AB InBev also bought out Grupo Modelo. So you saw this massive consolidation and the stat the chart that I've got pulled up Here is In 1998, the top four global beer companies accounted for 13% of combined market share globally. Ten years later, in 2008, the four largest accounted for 49% combined market share. So they, they basically almost 5x their market consolidation. I'm kind of saying that in a funny way, but the market became five times more consolidated, which we, and we talked about this on the Constellation Brands episode, when you have scale both globally but also regionally, because a lot of these companies, even though they might have global market share, they tend to have really strong market share in particular regions. There's a lot of economies of scale. You could raise prices, you've got better tie ins with the wholesalers, you've got, you can produce at a lower cost, which means you can generate better margins at the same price compared to niche beer brands, all that stuff. So here's what they saw when they talk about their investment. Says on the supply side, there is an encouraging capital cycle angle as the consolidation process has seen a reduction in brewery capacity, particularly in Europe, where the fragmented regional nature of the market meant that there had been persistent overcapacity to be exploited by retailers. Basically, a lot of the negotiating leverage between the retailers and the producers changed through this market consolidation. So they made investments in AB InBev, Coca Cola, Euro Pacific Partners, which I think has some alcohol tie ins and Then Sab Miller. I don't know if they still own them. I don't believe they do. But apparently those ended up being really good investments at the time. Any thoughts on the beer consolidation?
- [43:34]
Podcast Host / Narrator
It makes somewhat sense. You have. I think they may be for like a long term holding. They could potentially have underestimated and that's probably comes back to the uncertainty they have. Well, the end market demand wasn't that attractive over the perspective 10 years up to today. But when you look at the supply side of things, maybe for at least a few years, you can get some nice improvements. And these ones again, they might not be the forever holdings, but it's kind of a good way to look at okay, supply is decreasing and there's consolidation. Returns look bad today, but it's a durable industry and supply is decreasing. Well, you kind of got to plug your nose and say hey, the leaders are going to do all right over the next few years. You just can't time when the market's going to turn. But eventually if you have a kind of a 2, 3, 4 year time horizon, things can look great and you can get a really, really nice multi year run.
- [44:32]
Ryan Henderson
Yeah, the irony here in this case is that a lot of these stocks now modern day have been crushed due to the demand side of the equation, like concerns over less people Drinking GLP1s potentially impacting alcohol consumption. And that seems to be at the moment the biggest drag on the stock prices for a lot of these beer companies. But let's talk the second example here, and this is more of the businesses whose high returns are believed to be more sustainable than investors expect. So basically it's a fancy way of just saying good businesses that investors are underestimating. So one quote from the book was no part of the technology world has been more prone to cyclical booms and busts than the semiconductor world. It's funny now because obviously we're in a massive semiconductor boom and people might look at that and say like, well that didn't end up being a very bright comment. But if you look at the semiconductor leaders from like the 90s and the early 2000s versus the semiconductor leaders today, he wasn't necessarily wrong or the author in this case wasn't necessarily wrong. And I mean they actually almost cited intel as like a technologically advantaged business. Ironically, given that they are one of the worst performers in the sector recently. Well, maybe not recently, but last decade. The concern here was that since semiconductors had gone through so many cycles before, it allowed analog devices to be neglected by the market as yet another cyclical semiconductor company. However, Marathon basically came to the conclusion that it's a more resilient business with less booms and busts than digital chips. Analog the analog industry overall and there's
- [46:24]
Podcast Host / Narrator
a number of reasons Texas Instruments is the other player in this space, correct?
- [46:30]
Ryan Henderson
Yeah, I know Texas Instruments and Analog Devices have like their own sort of subsectors where they really dominate. But yes, Texas Instruments is, is the other big one.
- [46:40]
Podcast Host / Narrator
I feel like that would be up their alley.
- [46:43]
Ryan Henderson
Yeah, I wouldn't be surprised if that's one they invested in before. I mean they, they seem to know the analog semiconductor space really well. Here's a quote from them. It says these factors, they. They labeled a bunch of factors. Didn't want to read you the whole quote. So these factors, a differentiated product and company specific sticky intellectual capital reduce market contestability. These strategic advantages are compounded by the fact that Analog has a more diverse end market than Digital. With a much range of products numbering in the thousands and smaller average volume size. Such market characteristics make it difficult for a new entrant to compete effectively. Thus pricing power tends to be robust and market positions relatively stable over long periods. While the overall market is relatively fragmented, the five firm concentration ratio is about 50%. It is more consolidated in the various market subsegments. Analog Devices, for instance, has over 40% share in data converters. If you are looking at an industry where there hasn't been any real new entrant for a decade, at least of any real size, that's probably a good sign that it's a business that's hard to get into and hard to compete with. And I think Analog seems to be one of those where everyone thinks of semiconductors as one of the most competitive spaces. But Analog Devices to to this day is still doing really well for investors and I assume their market share hasn't changed too much. I guess I'm not an expert on the industry, but it also, it leads me to another point and this is one of my lessons from this episode. So I'm kind of spoiler alert here but if you have a business who's who is growing and they're generating high returns on invested capital while not investing much of their cash, while returning most of their cash flow to shareholders, that's probably a really good business because it's when the companies that generate high returns on capital but they're reinvesting every dollar. Obviously it depends on the industry, but usually that can end up really poorly. But if they have a history of returning all their cash flow to shareholders and they're still generating good returns on their invested capital. It's probably a pretty, pretty dang good sign.
- [49:05]
Podcast Host / Narrator
All right. And you have the chart here from our friends at Fiscal AI. Maybe it's a good point during the episode to mention them. Use our link in the show notes. Fiscal AI slash chitchat. You can get 50% of any paid plan. Part of the research for this episode. Whenever we look at a super Investor, we like to take and pop open. You know, there sometimes it's not the entire portfolio, especially for someone like Marathon who is a little bit more discreet than an investment firm like, you know, Buffett or Ackman or someone like that, but we pull up the 13F and part of fiscal AI, they aggregate all the super investor 13Fs and really I think all of them, Ryan, you know this better. All those 13Fs available, or at least most of them. So we can use that. And what I like with that, with the platform there is that you can go back pretty quickly throughout the quarters and go, oh, what did they own 10 years ago? What do they own 15 years ago? If you have that history, which can be quite fascinating, we've learned that use that a lot for a Super Investor episode. So again, physical AI chitchat and looking at the chart here, the Analog Devices has performed quite admirably, I think. What is it about a 20% annual return or the last decade? So pretty darn good. But that that leads us to the portfolio today. What's interesting is that now maybe it's because Hoskins is gone and he had that influence of something else. The more cyclical side of things, I'm not exactly sure, but they own, you know, a lot of big tech. It's kind of maybe surprising. They have Amazon, they have Microsoft, they have Meta, they have Nvidia. And maybe these are the companies they look and go, hey, these are our growth. Not necessarily just growth for growth, but the competitive advantage plays where they see that high return on invested capital and they probably think it's going to be durable. But what I think, and I'll let you see, give your opinion on what anything that's interesting. What I think is interesting is when they have different financials and healthcare within the space because maybe coming out of the interest rate hikes, that has kind of hurt a lot of the banking sector. It's made a lot of banking stocks struggle in recent years. That's probably led to a little bit of consolidation on expert on the space, but one that I own a stock and so I'm more interested in and kind of have kept up recently is health insurance and healthcare in general. They have Thermo Fisher, they have Elevance Health. Probably I think they would look at it as it's been a tough period for healthcare and biopharma and whatever the names for all those sectors are. I won't say I'm an expert on that. At least health insurance in general has been tough and maybe now you get consolidated supply. There's not going to be that much many competitors attracted to try to target the space and I think for myself they don't own this, but I do a company like Oscar Health where it's really, really hard to scale up in insurance and there's not going to be many other startups that do that. So that's possibly what they're looking at with the healthcare and financial space. But Ryan, you pulled up the screenshot here. What do you think about the portfolio?
- [52:10]
Ryan Henderson
Yeah, first thing I should mention is this is a 13F, so it's US listed holdings and this is a London based company and they do invest a lot in Europe so it's not going to have all their actual holdings in here. There's probably a lot of European companies or other global businesses that might not be listed here. But you definitely do see some companies that sort of deal in commodities. Southern Copper, Micron, I don't know if you can call that necessarily a commodity but Canadian National Natural Resources I would assume is commodity. So there's still that bend of like bottom of the cycle. Who's turning would would be my guess. But there's also, and maybe this is the exodus of the founder. It feels like there are certain companies that don't abide by the capital cycle theory necessarily or at least not maybe they have much longer capital cycles. Whereas like Amazon and Google E Commerce it's is massive. And I don't know if like being super fixated on the supply of E commerce is going to dictate the outcome of an Amazon investment and especially ones where they're not taking price, they're constantly lowering costs and they actually did talk about this in their second book as well. It's like that's an advantage that's going to be self reinforcing and it just doesn't. When I think about Amazon, it doesn't feel like that necessarily abides by their traditional capital cycle framework.
- [53:48]
Podcast Host / Narrator
It's almost the opposite. We're both in E commerce. You have Walmart kind of aggressively playing and then the Chinese players aggressively playing. You might have supply capital intensity increasing and then in the cloud there's also more competition growing up. So yeah, they definitely probably looking at that from a moat perspective. I noticed though looking at their portfolio micron they've begun to sell it down. So maybe that was one where they go look capital constrained. And now the plan is well all the companies have announced huge expansions and that feels like a classic capital cycle play. But we're going long on our hour here so let's close things out with examples of growing capital competition today and the opposite. Maybe I can go with the obvious one that we talked about throughout the episode. I think it's AI we also have. I think there's maybe a couple years ago it was kind of the consolidation play again in the defense and space markets. But you're seeing huge investments. I mean the palantirs of the world, SpaceX, Andrew, some of these are private but there's just huge growing capital deployed into space and defense. Same with AI And I think in general it's going to cause lower returns for that sector. Now the opposite may be true I think for electric vehicles, you know, it's gone through this cycle and maybe we're in a period of capital constraints. Although you look at China and there's, there's still just huge deployments of capital there. So I guess if you were looking at the US as a whole, you could possibly say that. But the China piece is a little add some uncertainty Now I think another one that's a good example that we've kind of grown up with is cannabis. It's an extreme era of pessimism. Supply is decreasing across the market, prices are crushed. The app, you know this, whatever they do, I don't know if it's sale per ounce or something like that, but either way pricing has been crushed. There was a huge oversupply and maybe we're coming out of the opposite of kind of this multi year cycle almost a decade long now from that 2018 period. But before I let Ryan go, maybe I'll talk about like comparing the AI bone to telecom as an example. You have again throughout the industries or throughout Wall street investment firms, the companies themselves, you have these projections of quote insatiable growth and demand we were a part of. I pay for Gemini Pro. The demand is increasing for AI tools, that's clear. But the predictions of growth like oh wow, ChatGPT has a billion users. That can lead you to a narrative that you just keep building more and more and more and disregard what your return on invested capital is. And this incentivizes everyone involved to get into the game of the Prisoner's Dilemma, where you have someone like Amazon who's been extremely frugal with AWS spending throughout the years. They have to go, well, do we risk getting left behind or do we sacrifice ROIC in the short term because, you know, like we it might hurt us over the long term. And almost every time in history, eventually there's oversupply. The researchers and investment banks are incentivized to keep the music going because that's where they earn money from in the boom. But it has nothing to do with creating value for shareholders. So in fact, if a company overspends by hundreds of billions of dollars and ROIC goes down the drain, they are destroying value. This is why Marathon again, one of the biggest lessons as we get into that is they track growth and contraction in supply. Whatever it is. Supply of, I don't know, software programs, supply of physical goods, supply every commodity in the ground. That's an easy one to understand. Oh, there's this growing supply of, you know, we have double the supply of silver out there. Well, the price is going to probably go down. And that is why Marathon's returns have been steady over the decades, because they focus on this. Because if you ignore it, I think that's a lot of times where you can get really hurt and buy a stock that goes down 80%.
- [57:44]
Brett Shafer
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- [58:39]
Ryan Henderson
Yeah, the AI Data center one this is an example where it's tough to recognize where you're at in the cycle in real time because and I guess whether it is a cycle, it checks a lot of the boxes for cyclical boom of everyone's fixated on demand. Feels like it's Endless. And you have companies popping up all over trying to build data center supply. Like not just the big guys, not just the big hyperscalers, but you've got Oracle, you've got all the other. What are the Nebius core weave. I think as well, there's probably some other ones. I'm not even thinking about that. To me, it's hard to not feel like the boom can't last forever here. Part of me thinks, yes, we're going to be oversupplied and there's going to be too much capacity with the hyperscalers, though.
- [59:44]
Podcast Host / Narrator
Oh, Ryan, are you saying this time is different?
- [59:48]
Ryan Henderson
No. Well, I don't think you'll have. I think in their case, they have so much cash flow that even if you do get a bust here, they're still going to survive and you're still going to get probably them buying up other people's bad data centers for pennies on the dollar.
- [60:07]
Podcast Host / Narrator
But that's when Marathon wants to invest. When there's consolidation because our OAC is going to be going down, then there's consolidation. I think it's classic, classic story there. I just
- [60:20]
Ryan Henderson
feels like they have such a good barometer on demand because a lot of it's through their own services for the hyperscalers. That's where it feels different.
- [60:30]
Podcast Host / Narrator
But I think ROIC is going to be down a couple years from now. That's my, that's my hunch, but we'll see.
- [60:36]
Ryan Henderson
Yeah, it's probably right. The other one, I guess too. Memory chips feels like everyone's talking about how we're so supply constrained there and that it's, you know, it's going to be hard to build more. We only have so many players and memory chip stocks have soared. That industry is like notoriously cyclical. And I would be shocked if we just get endless memory chip price hikes and there's only three players, or however many there are for the remainder. What are the big ones? Sk, Hynix, Samsung, Micron. Yeah, surely there's going to be more other semiconductor companies that start investing if this continues to be a bottleneck. The other one is gold and silver. I mean, both these. This is like the typical cyclical asset where high prices are the cure for high prices. And again, it's the same critique as the copper cycle in 2003, 2005 of, oh, it takes a long time to build mines. There's this massive bottleneck they're not going to be able to produce. That bottleneck goes away eventually if the companies are earning enough money. Governments will take over, they'll build their own mines. Whatever they want to do, they'll permit it, they'll take higher taxes on it. There's going to be more builds would be my guess for high prices is high prices. Yeah. Lessons learned from this episode from studying
- [62:10]
Podcast Host / Narrator
marathon okay, tracking supply. We've talked about that. I think connecting it back to competitive advantages is important. Where you can have that framework of layering on. I, I want a company that has a competitive edge but also looking at where they are in the capital cycle where you may not, may or may not want to invest in a company like Amazon or Nvidia. Right now, for example, you have Apple's position in the smartphone market that's allowed it to stay highly profitable, extract most of the hardware margins from or hardware profits from that industry. Even though there has historically been growing amount of smartphone supply at a very cheap price. I mean there's just insanely cheap SM funds you can get out there. Now I think looking at country level analysis can be helpful. A place like China or Japan may be detrimental because of frustrating managerial practices or government policies. And fourth for me, rising capital intensity can create a lose lose situation where a quality business is forced to just destroy their ROIC to maintain their position in the short run, which I say is potentially happening in AI. They close out a quote with the management here and it comes, it helps me, how do I say it? Reaffirm that maybe I'm on the right path with focusing on my trifecta framework of management, business quality and valuation. Because they say that when they're running, looking at a company within the capital cycle framework, they want someone that the management team understands this return on invested capital, returning capital to shareholders, stuff like that. And they have a quote here about different types of management teams from different countries and different cultures. Quote A tendency to build corporate empires is both the cause and result of these various abuses. In the French business world, managements which are entranced and unaccountable tend to behave in an arbitrary fashion. For example, General Day, I don't know what this company's name is, has increased its turnover by 50% over the last four years by diversifying into an enormous spread of businesses. As a result, the company's return on equity has declined from 18% to 11% and shareholders have suffered. Now you might just say this is the British bias against the French, but it's probably pretty clear there that empire building is never the the answer. All right, we're going along. Ryan, what were your lessons learned from Marathon Asset Management yeah, so the tracking
- [64:27]
Ryan Henderson
supply is something I probably hadn't given enough thought to. But I'm going to say tracking supply where applicable because there's, there's instances, there's industries where I think like how on earth are you going to do that? Like what are you going to retail? What are you going to track every retailer's like market share? How's that even possible? Like to know every business and whether they're increasing capex like is Lululemon increasing stores at the same rate? It's like it's not.
- [64:58]
Podcast Host / Narrator
You know, you could look at that. That was a growing competitive space the last five years and Lulu, Lululemon suffered from it. All these players.
- [65:05]
Ryan Henderson
I guess if you like hyper niche it where it's like athleisure sector. Yeah then, then maybe you can do it. But it just feels like some industries, it's almost too fragmented to really do like deep supply analysis. But I do think with most industries where there are a few big players that make up the majority of market share, you should be at a minimum checking competitors and checking their expansion plans and seeing what their management teams are saying. The other one here is return on invested capital while high return on invested capital while the company is returning most of its cash to shareholders is a very nice check. Like if they're able to do that that means they've probably got a durable business. And then the other one here was, I remember them talking about this in the book but it was companies that do more capital intensive things in general across the board with some fama and French study like increasing capex equity, issuance, mergers and acquisitions, that kind of stuff. Those underperform generally businesses that are taking capital out like whether it's spin offs, whether it's share repurchases, dividends, those companies tend to outperform the more capital intensive ones. It's again I'm saying usually there but less capital invested, usually better.
- [66:40]
Podcast Host / Narrator
I think that's a good way to go about it. Maybe the overarching theory from capital cycle theory should be. Yeah, just go for stuff. FICO, S&P Global, Visa, MasterCard or the Capital doesn't even matter because there isn't any or there's a minimal amount. All right, this has been a long episode. Ryan, anything before we get out of here? Closing thoughts or. I think that summed it up. All right. Ryan's giving me the head shake so I think I can hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I or Any podcast guest may hold securities discussed in this podcast may have held them in the past and may buy, sell, or hold them in the future. Thank you everyone for tuning in. And if you like this episode, give us a suggestion. We're doing 2026 is the final year of the Super Investor series. We can't, you know, there's only so many we can do. So as we close things out, give us any recommendations on some companies we can do. But thank you everyone for listening. Hope you learned a lot from this episode and we'll see you next time.
- [67:49]
Brett Shafer
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