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We're back with an absolute banger of an episode - Capital Returns! The core idea behind Capital Returns is that high returns tend to attract more capital, aka competition, so over time what may have been an incredibly profitable company can deteriorate into a commoditized business. This is a crucial insight for both operators and investors alike. In the episode, we discuss different ways to take advantage of the capital cycle, such as Sam Zell's grave dancer playbook and the scaled economies shared framework that Costco operates under. We also touch on how ever-changing tech businesses can sometimes avoid the pernicious effects of the capital cycle, usually by establishing a mission-critical operating system for their end customer or by benefitting from a viral network effect. It's been a long time since we've been back, and we have a big surprise for you in this one, so we hope you enjoy it!
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Capital Returns: Investing Through the Capital Cycle 2002 to 2015 - Marathon Asset Management
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Recommendation of the Week: Taming the Mammoth - Why You Should Stop Caring What Other People Think
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The Web of Ideas: Capital Returns (my notes on the book)
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Show Notes:
2:50 - The big reveal
4:39 - High returns tend to attract competition
6:56 - Zeckendorf's first time dealing with oversupply
10:33 - The widget manufacturer
15:58 - Competition KILLS returns
22:02 - The misaligned incentives behind banking
28:24 - Sam Zell's grave dancer approach to investing
35:07 - Costco: the ultimate example of scaled economies shared
48:29 - If change is the only constant in technology, how do we protect ourselves???
56:28 - The sudden winners of today can just as easily become the losers of tomorrow
