Chit Chat Stocks - Investing Through The Capital Cycle And a Warning For AI Stocks? (Marathon Asset Management)

Episode Date: March 18, 2026

On this episode of Chit Chat Stocks, we dive into another super investor series covering Marathon Asset Management, a fund that has been around for decades, investing through a framework called Capital Cycle Theory. We discuss: (00:00) Introduction (02:46) Understanding the Investment Philosophy (05:19) The History and Performance of Marathon (11:07) Capital Cycle Theory Explained (19:50) The Evolution of Earnings Reports (21:37) Case Study: The Telecom Bubble (27:15) Management's Role in Capital Cycles (31:55) Insights from Capital Returns (36:34) Investment Strategies in Capital Cycles (39:04) Beer Industry Consolidation and Investment Opportunities (43:32) Sustainable Returns in the Semiconductor Sector (51:09) Portfolio Insights and Market Dynamics (56:44) Lessons Learned from Marathon Asset Management ***************************************************** Sign up for our stock research service, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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 at ibkr.com slash forecast. Last trading day is March 22nd. More on this later in the episode. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer 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, please enjoy this episode.

Welcome into the Chitchat 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, try to apply lessons to today's market. And 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 podcasts.

We don't care if it's YouTube, Spotify, Apple Podcasts, 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 Mode 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. No, I didn't know much about Marathon asset management and just for anyone uh that looks them up after the show or or is interested in them there are two separate ones i believe so there's marathon asset management london

and marathon asset management uh new york which i think is like a debt uh primarily invests in fixed income new york one not related yeah right 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 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 uh 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 um i guess maybe dishonest yes and i was going to say dishonest activity out of wall street as well yes um 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. Yep. And just for maybe a brief overview, their philosophy is maybe a different way to go about and find companies with modes, 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 not it's it's on the opposite end of the spectrum from the Motley Fool, the David Gardner's, the Tom Gardner's of the world, which we enjoy. You know, we have those type of stocks in our portfolio as well. But I think this is another good lesson, especially, you know, we learned I learned a lot from studying this 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 But 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 get to the company, the investment firm itself.

Marathon Asset Management was founded in 1986 and has grown into an investment fund with tens of billions in AUM today. But we cannot confirm what their audited results have been since inception. the sourcing I found says that they have returned around 10% per year since 1986 through the mid 2010s. Now, I think, oh, just 10% per year. But remember, 1986, 1987 was kind of a peak in market valuations. And 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 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 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 it to the World Index, but 80% of our holdings are from the United States. Well, you know, you might have underperformed 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 Arra, 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 cornflakes. 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 in the entire market. But he wrote this, I believe,

in 2002, 2003, right in the dot-com bust. 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 cycle 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 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 getting 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 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, it might have been a bit unethical to do that. Oster and Arat, hopefully, again, I'm pronouncing that right. They retain control of Marathon today. And even with these legal disputes that happened, Hoskin launched Hoskin Partners, which has billions in AUM as of this moment. I think they're still operating right now. There are all these egos in the investing world, especially among fund managers. And estimates say that Hoskin 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 undiscovered stuff, you know, maybe at the bottom of the capital cycle as they discuss 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 uh 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

sleeping 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 our 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, you know, 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 yeah it isn't the absolute best performance we've ever seen uh out of out of the investors we've studied but they did it for a long time you mentioned it was 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 i and we'll get into the book that 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 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 was I'm impressed by the company. Obviously, a lot of really bright investors have come out of there, Nixley concluded. 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. 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 specific 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 of the growth side of the spectrum. Those type of strategies, while it run smartly, can produce solid returns over the long term, they can also experience very severe drawdowns where this one, if you're more, 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 Peter 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 to 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 cycle theory 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 cycle 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

and 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 circle here. 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 grows faster than demand. Then returns fall below the cost of capital. Your return on investment capital decreases. And then second, 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 we're 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 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 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 companies I 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 reach quarter third companies companies purposely putting out guidance and guiding below what they think they can hit which is the sandbag thereby setting up the capability to quote beat every quarter and 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 earning spot. 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 is great. Okay, well, I don't really care about that. Now, Marathon believed and probably still is that this has highly and deeply corrupted management teams. As they will say time and time

again, 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 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 U.S. Consumer

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today last trading day for this contract is march 22nd yeah just to kind of summarize what you just laid out there basically sort of the entire crux of marathons investment belief uh 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's the basics. And there's also, I'll talk about in the second book, Capital Returns, which is kind of

a perfect name, honestly. It's the same just, 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 now 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 like most most of the investors most of the 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? Sure. So in capital account covers, really, they produced it right when the telecom bubble busted. And it 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 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 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 you don't see the returns deteriorate overnight. So eventually,

it leads to a bust, and this has happened 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 interests at the expense of all of their clients' long-term interests. At the time, they purchased shares in the booming telecom 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. There's the British coming out in them. In addition, retail investment firms found it lucrative at the time to sell internet and technology funds to the public. So again, this is kind of like, I forget who has the saying, but it's like when the ducks are quacking, you got to feed them. There's just an incentive for everyone playing in a boom to be a part of it. You don't want to feel 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 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 what is 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 maybe they're all equal. Maybe one has 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 no well we've studied it before and looked at it and i do think that analogy is or that uh 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 ten dollars 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 uh 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 even, 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, but, 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 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. 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 of poor previously but when they saw um 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 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, 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 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 at 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 is growing. 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 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? Maybe it'll work out, but I think generally Marathon Capital would not be investing in this. 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 is a good example of this of a good management team um but any 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 yeah it's i don't know

if i have any particularly good single examples of industry 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 trying to gain market share they kind of work it's almost like frenemies in a way where rational competition it's like pepsi yeah yeah or like o'reilly and autozone like you know that i think that's kind of one analogy home depot and lowe's maybe although those are can be a little more aggressive towards one another apple i 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 well so much on their core product i'm okay i would be okay with that as a shareholder. 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 yeah so this book covered basically 2004 to around 2014 time period maybe i think 2014 was

sort of the 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 right 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 boom 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 eat 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 um okay let's talk about some of the cycles copper cycle of 2003 to 2005 uh one thing i picked up on reading this book is i see this all the time uh it's so easy to make the case that this time is different and like when you're in sort of a cyclical boom

and oftentimes the reason people say it is they they talk about supply constraints we had um 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're 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 uh 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 of my some mining companies believe that there's enough supply coming on stream and 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 uh people still get bullish

even when commodity like we're talking about uh silver and gold right now i think both of them are up like 100 over the last year correct maybe it was like depressed for a long time but i immediately asked i asked ai i was like what uh 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 it's it i think it's very very rare for something to not be for a bottleneck to last forever like 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 um 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 uh brett talked

about sort of that circle of the capital cycle where it's uh earning good returns entices competition returns go down and then you know 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 they can that company can continue to do it for longer than analysts expect they're willing 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 competitions starting to diminish because returns have been so poor for a few years. And there's two examples of that

that I'll go through. Any thoughts there, Brett? Okay. When I sell my business, I want the best tax and investment advice. I want to help my kids and I want to give back to the community. Ooh, then it's the vacation of a lifetime.

I wonder if my head of office has a forever setting. An IG private wealth advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center find your advisor at igprivatewealth.com new from nespresso blend

wellness into your coffee routine with a coffee plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng Delight, our new double espresso with ginseng extract. Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. I 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 Fool 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 it relates well, beer. Maybe this is the time to invest because again, we're seeing supply decrease and demand decrease at the same time. 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

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 border, 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. In 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 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 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 basically almost 5X'd 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 that 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 investments. It 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 in bev coca-cola euro pacific partners which i think has some uh alcohol tie-ins and then sab miller i don't know if they still own them i don't believe they do uh but apparently those ended up being really good investments at the time any thoughts on the beer consolidation 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 it's kind of a good way to look at okay supply is decreasing and there's some consolidation returns look bad today but it's a durable industry and supply is decreasing well you kind of got to pull 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 two three four year time horizon things can look great you can get a really really nice multi-year run 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 uh 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 suspect or expect so basically it's a fancy way of just saying good businesses that investors are underestimating so uh 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

uh 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 uh ironically given that they are one of the worst performers in the sector recently well maybe not recently but last decade uh the 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 bus than digital uh chips analog the analog industry overall and there's a number of reasons texas instruments is uh the the other player in this space correct

yeah and they 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 i feel like that would be up there alley yeah i wouldn't be surprised if that's one they'd invested in before i mean they seem to know the analog semiconductor space really well here's a quote from them it says these factors 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 wider 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 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 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 a 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 much of their while returning most of their cash flow to shareholders that's probably a really good business because it's it's when the companies that generate high returns on capital but they're reinvesting every dollar obviously

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. 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 15% off 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, 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 of those 13Fs available, or at least most of them. So we can use that. And what I like 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 did they own 15 years ago? If you have that history,

which can be quite fascinating. We've learned that, we use that a lot for Super Investor episodes. So again, physical.ai slash chitchat. I'm looking at the chart here and the analog devices has performed quite admirably. I think, what is it, about a 20% annual return over the last decade, so pretty darn good.

But 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 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 anything that's interesting. What I think is interesting is when they have different financials and health care 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 the next round of space. But one that I own a stock in, so I'm more interested in and kind of have kept up recently is health insurance and health care 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 health care and biopharma and whatever the names

for all those sectors are. I won't say. I'm an expert on that. But at least health insurance in general has been tough. And maybe now, you know, 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? Yeah. First thing I should mention is this is a 13F. So it's U.S. 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. uh so and 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 it's 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 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 uh 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... grow maybe a couple years ago it was kind of the the consolidation play again in the defense and space markets um but you're seeing huge investments i mean the palantirs 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 still just huge deployments of capital there. So I guess if you were looking at the U.S. as a whole, you could possibly say that, but the China piece is a little, adds 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, supplies decreasing across the market, prices are crushed. whatever they do I don't know if it's sale per ounce or something like that but either way, pricing's been crushed there was a huge oversupply and maybe we're coming out of the opposite of

this multi-year cycle, almost a decade long now from the 2018 period but before I let Ryan go, I'll talk about comparing the AI boom 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 in demand. You know, we were a part of it. I pay for Gemini and Pro. The demand is increasing for AI tools. That's clear. But the predictions of growth, you know, like, oh, wow,

Jack GPT 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 throughout the years, they have to go,

do we risk getting left behind or do we sacrifice ROIC in the short term because 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 of a commodity in the ground. That's an easy one to understand. Oh, there's just 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 marathons 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%. Okay. When I sell my business, I want the best tax and investment advice. I want to help my kids and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever center an ig private wealth advisor creates the clarity you need with plans that harmonize your business your family and your dreams get financial advice that puts you at the center find your advisor at igprivatewealth.com new from nespresso blend wellness into your coffee

routine with the coffee plus range infused with functional benefits choose the coffee you love with added B vitamins like coffee plus B12 to help support immune function and coffee plus B6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com yeah the 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 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 core weave i think as well there's probably some other ones i'm not even thinking about that to me it it's hard to not feel like the boom can't last forever here like they're part of me thinks yes we're going to be oversupplied and there's going to be too much capacity with the hyperscalers though uh-oh ryan are you saying this time is different 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 they're still going to survive and you're still going to get uh probably

them buying up other people's bad data centers for pennies on the dollar but that's one marathon wants to invest when there's consolidation because roac is going to be going down then there's consolidation i think it's classic classic story there i just it it 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 but i think rsc is gonna be down a couple years from now that's my that's my hunch but we'll see yeah that's probably right the other one uh i guess two memory chips feels like everyone's talking about how we're so supply constrained there and that it's you know it's gonna 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 uh and there's only three players or however many there are for the remainder what are the big ones sk hynix surely there's going to be more uh 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 uh where high prices are the cure for high prices and again it's the same same uh critique as the copper cycle in 2003 2005 of oh it takes a long time to build mines there's this massive bottleneck it's not gonna 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 they'll build their own minds whatever they want to do they'll permit it they'll get you know take higher taxes on it there's going to be more builds would be my guess uh here for high prices is high prices yeah lessons learned from this episode from studying 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 want a company that has a competitive edge, but also looking at where they are in the capital cycle where you 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 or hardware profits from that industry, even though there has historically been a growing amount of smartphone supply at a very cheap price. I mean, there's just insanely cheap smartphones 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 um they close out a quote with the management here and it comes it helps me um i say 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 de, ooh, de, 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 answer. All right, we're going long. Ryan, what were your lessons learned from Marathon Asset Management?

Yeah, so the tracking supply is something i probably hadn't given enough thought to but i'm gonna 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 is that even possible like to know every business and whether they're increasing capex like is lululemon increasing stores at the same rate like it's not you know you could look at that that was a growing competitive space the last five years and louis lou lemon suffered from it from all these all these players i guess if you like hyper

niche it where it's like at leisure sector uh 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 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 of 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 spinoffs, whether it's share repurchases, dividends, those companies tend to outperform the more capital intensive ones. uh it's again i'm saying usually there but less capital invested usually better 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 sums 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 are any podcast guests. 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. I've made some questionable decisions that didn't end up the way I planned.

And today, I'm still figuring it out. Somehow, things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.