Capital Returns Quotes

“I enjoy my Picassos,” he says with a glint in his eye, “and, unlike some, I have never had to sell to pay the fines.” I ask about his recreational interests and for once he looks uncertain. His eyes scan the room for inspiration, or perhaps help from his PR adviser. His gaze eventually rests on a landscape painting. “I shoot sheep,” he declares darkly. With that he stands up, baring his teeth in a maniacal grin. “I really have taken up far too much of your time.” He leaves before the bill arrives. When it comes, like many former clients, I am left grappling with the awful financial consequences of my encounter with the Greedspin banker.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“The arch-capitalist began his working life as a bond trader at Greedspin in New York in the 1960s. He rose to become one of the firm’s most successful M& A advisers during the 1980s and 1990s. His role in the disastrous merger of General Chocolate and ByteBack in 2000 led to his departure in 2004, following an official investigation into irregular practices. “I have no regrets about that deal. For General Chocolate, it was a case of either eat or be eaten.” The sommelier arrives with the red wine, quickly followed by the main course. Churn impales his meat, cuts it into squares and dispatches it to his molars. His songbird side order–a dish which is now banned in the EU on animal rights grounds–is skewered and consumed, beak-to-tail, in a single mouthful. “Do you know, they drown it alive in Armangac!” he exclaims as he noisily munches through the bones. Establishing a pattern which was to be repeated, Churn bounced back from the General Chocolate fiasco in a new guise. In 2005, he re-emerged as the Chairman of RearView Capital Partners, the private equity firm, at a time when huge sums were raised and invested at the peak of the credit bubble. “I have always tried to find the hot areas of the market where I can facilitate the flow of money. In our business, flows mean fees. It’s really very simple.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“It was time to move on, which is why I’m now living here in the land of the cuckoo clock. Didn’t someone once say, “all successful careers in finance end up in Switzerland?”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“After all, the Fed has driven down rates with the intention of encouraging investors to take on more risk. Yet those who embrace low yields, poor credits, thin liquidity and even currency mismatches today may discover, when market conditions deteriorate, that the modest yield pick-up proves poor compensation for future losses. Mr. Piketty can rest easy. In an age when risk-free assets yield little or nothing, the determination of the wealthy to earn somewhat more will, in due course, do more to restore equality than his proposed taxes. A free market solution to a political problem–who says capitalism is failing?”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“The Japanese experience, since the early 1990s, is worrying in this respect. After the bubble economy collapsed and the private sector went into deleveraging mode, low interest rates have prevailed. During Japan’s two lost decades, returns on equity have been persistently lower than in Europe or the US–they currently average around 8 per cent compared to 12 per cent and 15 per cent respectively, albeit with lower gearing. Despite Japan introducing the world to ZIRP (the zero-interest rate policy), the country’s nominal GDP per capita remains below the 1991 level. Rather like the current Western experience, the decline in private sector leverage has been replaced by rising public sector debt–which is now over 200 per cent of GDP, up from around 50 per cent in the early 1990s. Total debt, both public and private, is greater today, relative to Japan’s economy, than in 1990. In short, Japan’s long experiment with low rates has hardly been a positive one, with respect to either corporate profitability or the country’s ability to outgrow its debt burden.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“world, where competition was seen as regional in nature, have suddenly become global. Because of the difficulty of assessing what motivates competitors under conditions of state capitalism, capital cycle analysis tends to be more effectively applied to industries which are largely domestic in nature or where the dominant players are inclined to Anglo-Saxon style capitalism (as is the case in the global beer industry).”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“The problems of European auto-and steelmakers relate primarily to a fall in demand as opposed to any recent overbuilding of domestic capacity in more favourable macroeconomic conditions. Other industries have suffered from disruptive new technologies or business models which have left legacy companies struggling to cope. Flag-carrier airlines, saddled with outdated employment contracts and national champion status, have suffered greatly from the growth of unencumbered low cost carriers. The CEO of struggling SAS in Scandinavia recently bemoaned the lack of a Chapter 11 process in Europe. Perhaps he is jealous of a system which in the US has led to the anti-Darwinian outcome of the survival of the least fit!”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“Compared to a conventional debt instrument, what makes securitization so attractive is the fact that the airline often retains the junior tranches. These become an asset on its balance sheet. Any discount associated with the low credit rating of these layers is more than offset by the discount on the purchase of the aircraft, thereby creating an immediate profit and cash inflow on delivery of the aircraft. Such are the wonders of modern financial alchemy. Under good, even normal, business conditions, the airline makes lease payments to the securitization vehicle. But in a recession or a bankruptcy filing, when payments are suspended, the owners of the senior strata are able to seize the collateral. The junior participants in the securitization have no rights, and any such assets on the airline’s balance sheet must be written down to zero, further increasing the airline’s losses. By this clever piece of financial engineering, the airline gets shiny new planes for an extremely low cost of funds–recently as low as 6 per cent–while equity shareholders carry nearly all of the business risk. That an industry which has rarely earned an acceptable return on capital should have access to such cheap capital is quite astonishing.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“Charles T. Munger is fond of saying that there are “more banks than bankers.” A competitive advantage based on a willingness to make loans in an instant would be anathema to old-fashioned bankers. Of particular concern to us is the extent to which Irish bankers engage in the hard-sell to investors. One of them declared at the conference we recently attended: “I am here unashamedly to sell you X bank!” This rather goes against our preference for bankers as cautious individuals, obsessed with long-term downside risks. As we have seen in many other businesses, an obsession with growth, combined with overpromotion, is likely to end in tears. As to when this will happen, we must wait for time, Ireland’s proverbial story teller.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“There are numerous examples of successful cultures among our portfolio companies: the empowerment of branch managers that promotes responsible banking at Sweden’s Svenska Handelsbanken, for instance. Reckitt Benckiser, another holding, fosters an entrepreneurial spirit among its senior managers. Yet even if a strong culture is instilled in a company, it can take many years for its full effects to play out. That may be beyond Wall Street’s limited investment horizon. Long-term investors, however, would be wise to take heed.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength ... . On a daily basis, the effects are imperceptible; cumulatively, though, their consequences are enormous. When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as “widening the moat.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“We were equally impressed to learn that senior executives at another company preferred the underground to chauffeured limousine when travelling around London. The number of IR representatives in attendance is a good indicator as to how carefully a company counts its pennies. Of course, we have made mistakes when assessing management teams. But, in our view, trying to spot a great manager remains a game very much worth playing.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“Forming impressions of the CEO’s character, intelligence, energy and trustworthiness can be gleaned using a variety of questioning techniques. Intellectual honesty can be tested by asking the CEO to pick out what he or she thinks is important. To unsettle the more promotional CEOs, we like to ask what is not working and wait to see whether they have given the matter much thought.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“Our historical tendency to be overweight the Nordic stock markets has mostly been influenced by the perceived quality of Nordic management teams. Generally speaking, Nordic managers have been able to articulate their case clearly and apply a degree of focus that is not always the case elsewhere in Europe. One can also discern a high degree of adaptability. Scandinavian companies are not just open to foreign excursions. It was striking to note on a recent trip just how many of the large and successful companies are run by foreigners. A Belgian is head of Atlas Copco, a Scot runs SKF, and Nokia and Electrolux have recently recruited American bosses. This openness to outsiders stands in contrast to recent developments in Southern Europe, where Italy and France are engaged in a race to the bottom to redefine strategic industries for protectionist purposes.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“The herd-like behaviour of companies and their managements never loses its power to astound. All too often, when one company decides that buybacks are the thing to do, then its competitors will play the game too. By the same token, capital raising (secondary issues) often appears at the same time among multiple companies in the same industry. One reason they act together is that no company wants to see competitors gain a funding advantage.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“3. Living in a cocoon Specialist analysts operate in a cocoon, in which they are overexposed to company management and peer analysts and underexposed to what is going on in the rest of the world. Herding instincts may tend to reinforce similar opinions among peer analysts. Their thinking starts to reflect what Daniel Kahneman calls the “insider view.” In the case of Ahold, the specialist retail analysts spent a great deal of time comparing the company’s performance, on a range of measures, with US peers such as Albertson’s and Kroger. As global investors, however, we find it more useful to compare the returns of a company in a particular industry with those in other industries and countries. A specialist analyst couldn’t say whether Ahold was a good investment relative to, say, a Scandinavian paper company or a Thai cement plant.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“In particular, there is strong social pressure from peers, colleagues and clients to boost near-term performance. Even if one has developed the analytical skills to spot the winner, the psychological disposition necessary to own shares for prolonged periods is not easily come by. J.K. Galbraith observed that: “nothing is so admirable in politics as a short-term memory.” Why should politics have a monopoly on sloppy thinking? Which makes us think that long-term investing works not because it is more difficult, but because there is less competition out there for the really valuable bits of information.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“The longer one owns the shares, however, the more important the firm’s underlying economics will be to performance results. Long-term investors therefore seek answers with shelf life. What is relevant today may need to be relevant in ten years’ time if the investor is to continue owning the shares. Information with a long shelf life is far more valuable than advance knowledge of next quarter’s earnings. We seek insights consistent with our holding period. These principally relate to capital allocation, which can be gleaned from examining the company’s advertising, marketing, research and development spending, capital expenditures, debt levels, share repurchase/ issuance, mergers and acquisitions and so forth.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“While the case for long-term investment has tended to centre around simple mathematical advantages such as reduced (frictional) costs and fewer decisions leading (hopefully) to fewer mistakes, the real advantage to this approach, in our opinion, comes from asking more valuable questions. The short-term investor asks questions in the hope of gleaning clues to near-term outcomes: relating typically to operating margins, earnings per share and revenue trends over the next quarter, for example. Such information is relevant for the briefest period and only has value if it is correct, incremental, and overwhelms other pieces of information. Even when accurate, the value of the information is likely to be modest, say, a few percentage points in performance. In order to build a viable, economically important track record, the short-term investor may need to perform this trick many thousands of times in a career and/ or employ large amounts of financial leverage to exploit marginal opportunities. And let’s face it, the competition for such investment snippets is ferocious. This competition is fed by the investment banks. Wall Street relies heavily on promoting client myopia to earn its crust. Why”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“The fact is that one person’s growth stock is another’s value stock. Recently, the investment data company Lipper has reported that Citigroup, AIG and IBM are among the top 15 mutual fund holdings in both the large company “value” and “growth” categories. This brings us to our next point, which perhaps best explains why Marathon should never be labelled as a pure value investor. Our capital cycle process examines the effects of the creative and destructive forces of capitalism over time. A growth stock usually becomes a value stock after excess capital, lured in by large current profitability, brings about a decline in returns. When this becomes extreme, as was the case during the technology bubble, the resultant bust can turn growth stocks into value stocks almost overnight. The telecoms sector provides”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“Taking all these things together–the emphasis on pricing, the focus on cost reduction and balance sheet efficiency–an improvement in both margins and return on capital was to be expected. As for valuation, the average free cash flow yields of 6–7 per cent imply growth rates of around GDP or a little less, which suggests that the stock market is underestimating the potential long-run benefit to be derived from market consolidation and improved discipline. In the light of an improving capital cycle among brewers, we find ourselves able, to paraphrase Sir Winston, to overcome our prejudice and begin increasing our exposure to beer. 6”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“This encouraging process is continuing with, for example, the largest players in the UK market all having announced price rises of 4 per cent already in 2010. In emerging markets, pricing growth has been easier to achieve, in part due to the greater fragmentation of the retail channel and generally higher levels of inflation which have made it possible to hide price increases. Here, as well as volume growth, the story is one of increased “premiumization”–persuading consumers to trade up as they become wealthier.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15

“It is relatively easy to identify those industries where these conditions exist currently (just look at existing returns on capital), and it is for this reason that the really juicy investment returns are to be found in industries which are evolving to this state. The joy from a capital cycle perspective is that most investors are, for a variety of behavioural reasons, taken by surprise. Across many competitive battlefronts, we are always looking out for the next outbreak of peace.”
― Edward Chancellor, Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15