Avoiding Value Traps with Capital Cycle Theory

During their recent episode, Tobias Carlisle and Mike Meixler discussed Avoiding Value Traps with Capital Cycle Theory. Here’s an excerpt from the episode:

Tobias: -and other kinds of businesses that are just temporarily cheap and might not have that secular decline in them? How do you tell the difference?

Mike: I don’t think it’s easy. I read a great quote recently that said, “An expert is someone who’s made every mistake you can make in a very narrow field.” [laughs]

Tobias: I like that.

Mike: I was talking to a friend who’s an electrician. He’s like, “Yeah, every master electrician has shocked the shit out of himself into a near death experience.” [chuckles] So, I think part of avoiding value traps is– In some ways like that whole thing about capital cycle theory, I think has a lot of validity.

Even in my small town, I remember, 25 years ago, there was a guy that was making money hand over fist on many storages. And of course, he tells all his buddies. And then, suddenly, there’s 10 mini storages in town and there’s 50% vacancy rates. Some of them are selling for the bank debt. And then, in another 10 years they’re all leased up and doing fine.

This is interesting. It’s one of the plays in my playbook. But sometimes a company that has really good assets can be losing money, and that can be a great time to buy if the assets are good. I used to, not so much anymore, but–

The refineries were good examples, because we hadn’t built a new refinery in 40 years. There would be times when the crack spread turns negative and they’re losing money, and Wall Street is downgrading, and people are selling. And then, you just know that those assets are irreplaceable, we’re not building anymore. At some point, the crack spreads are going to turn positive, they’re going to make money. So, I think things like that.

My friend, Colin Peterson, who– He writes a great blog, Credit Bubble Stocks. We joke about sum of the parts analysis that you get with value traps. He came up with a great quip is that, “Sum of the parts is when some of the parts aren’t very good.”

Tobias: That’s great. Yeah, sum of the parts go to zero.

[laughter]

Mike: Yeah.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts