THE TENETS OF CAPITAL CYCLE ANALYSIS

From Ed Chancellor in his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager's Reports 2002-15:

The essence of capital cycle analysis can thus be reduced to the following key tenets:

• Most investors devote more time to thinking about demand than supply. Yet demand is more difficult to forecast than supply. 
• Changes in supply drive industry profitability. Stock prices often fail to anticipate shifts in the supply side. 
• The value/growth dichotomy is false. Companies in industries with a supportive supply side can justify high valuations. 
• Management’s capital allocation skills are paramount, and meetings with management often provide valuable insights. 
• Investment bankers drive the capital cycle, largely to the detriment of investors. 
• When policymakers interfere with the capital cycle, the market-clearing process may be arrested. New technologies can also disrupt the normal operation of the capital cycle. 
• Generalists are better able to adopt the “outside view” necessary for capital cycle analysis. 
• Long-term investors are better suited to applying the capital cycle approach.