Investor Audibles: Hosking Partners May 2025 Letter

Episode Summary

Executive Summary: The episode is a read-through of Omar Malik’s 2025 Hosking Partners note on the “capital cycle,” arguing that long-term investing should focus on supply, return on capital, management quality, replacement value, and behavioral edge rather than quarterly earnings. It uses Buffett, Apple, AmEx, TSMC, Coupang, Altius, and Amazon to show how durable compounding comes from industry structure, capital allocation, and contrarian patience.

Main Topics: The Capital Cycle as a long-term investing framework (Priority: 5/5): The note argues that predicting 10- to 20-year outcomes is more feasible by analyzing industry supply, capital allocation, and competitive dynamics than by forecasting near-term demand or earnings. Focus on supply over demand (Priority: 5/5): A central thesis is that changes in supply drive future returns on capital; high returns attract entrants, excess capacity later depresses returns, and eventual consolidation restores profitability. Ignore the quarterly earnings game (Priority: 5/5): The transcript criticizes market obsession with quarterly beats/misses and argues that durable share-price performance is determined by long-run ROIC and competition, not short-term earnings noise. Find exceptional capital allocators ('400 hitters') (Priority: 4/5): Beyond industry structure, investors should back managers who allocate capital countercyclically and prudently, enabling ownership through cycles without frequent trading. Remember replacement value (Priority: 4/5): The note emphasizes buying assets below replacement cost, especially in depressed industries, because that creates downside protection and can catalyze consolidation. Dynamic portfolio construction (Priority: 4/5): Hosking Partners describes using concentrated core holdings, small tail positions, and baskets to express views across different capital-cycle situations, showing a flexible value approach. Behavioral edge and Buffett as a 'Swiss army knife' (Priority: 3/5): The transcript frames contrarian investing as psychologically difficult but rewarding, and argues Buffett’s career spans many styles—compounders, deep value, baskets, activism, arbitrage, and commodities.

Key Arguments: Long-term forecastability comes more from supply-side analysis than demand forecasting, because supply additions are usually visible in advance and create more predictable industry cycles. Returns on capital, not quarterly earnings, are the main driver of long-run share prices, so investors should study competitive structure and ROIC trajectories. Industry consolidation and capital discipline can create multi-decade compounding opportunities when barriers to entry or high replacement costs suppress new supply. Strong managers matter because they can allocate capital countercyclically, avoid empire-building, and amplify the benefits of favorable industry structure. Buying below replacement value provides margin of safety and often aligns with cyclical troughs, where the market undervalues assets and strategic buyers would pay more. Buffett’s best investments often fit the capital-cycle lens: railroads after consolidation, American Express after brand/network durability proved resilient, Apple after ecosystem lock-in and buybacks, and Coca-Cola/Disney when replacement value was understated. A dynamic, unconstrained portfolio can combine core compounders, opportunistic tail bets, and baskets in industries where identifying the single winner is difficult but the sector outlook is attractive. The capital cycle framework helps investors be contrarian with discipline by identifying when current demand pessimism coexists with improving supply fundamentals.

Data Points: Buffett stake in American Express: $1.3 billion cost; $39 billion value including dividends - Used as an example of ignoring quarterly earnings noise and holding through multiple drawdowns American Express holding period return: 33x in about 30 years - Illustrates long-term compounding from durable franchise quality TSMC ownership period: Held since 2013 at Hosking Partners - Presented as a supply-side thesis held through many semiconductor cycles TSMC industry consolidation: From over 20 players to just 3 - Evidence of foundry consolidation and scale advantages Apple buyback scale: Over $500 billion retired over the last decade - Used to show capital allocation inflection toward shareholder returns Coupang fulfillment footprint: Over 130 fulfillment centers and more than 47 million square feet - Replacement-value discussion for its logistics network Coupang population coverage: Over 70% of South Korea's population lives within 7 miles of a warehouse - Supports the argument that the logistics network is hard to replicate Coupang build cost estimate: About $9 billion - Estimated cost to build the infrastructure, excluding brand value Coupang historical EV at first identification: $18 billion - Used to argue the market priced the business below replication cost Coupang current market cap mentioned in transcript: $51 billion - Speaker checks current market cap while discussing appreciation Oil and gas CapEx decline: Down 70% from the peak - Supports the view that the energy sector has become more capital disciplined U.S. shale contribution to new supply: 80% of new supply over the last decade - Used to argue that the shale expansion is plateauing Altius compounding: 20%+ annual compounding for 30 years - Example of long-lived royalty strategy and contrarian capital allocation BNSF/railroad industry consolidation: From over 100 players in the 1960s to 5 - Illustrates Buffett’s supply-side logic in railroads Disney stake valuation: Entire company valued at $80 million - Example of buying below implied replacement value and market underestimation Coca-Cola market cap mentioned by Buffett: $14 billion at the time of Berkshire's stake - Used to discuss replacement-cost and strategic value Japanese trading houses valuation: About 7x earnings - Example of basket investing in an industry with shareholder returns and hard-to-pick winners

Pivotal Quotes: "Your goal as an investor should be to simply purchase at a rational price a part interest in an easily understood business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now." — Berkshire Hathaway / Warren Buffett: Quoted as the foundational long-term investing standard and the basis for the '10-year question' "Over the long run, it is a company's return on capital, not changes in quarterly earnings, which primarily determines the direction of its share price." — Edward Chancellor (quoted by Omar Malik): Presented as the essence of the capital cycle framework and a rebuttal to the quarterly earnings obsession "I didn't go into Apple because it was a tech stock. I went into Apple because I came to certain conclusions about both the intelligence with which the capital would be deployed, but more important, about the value of an ecosystem and how permanent that ecosystem could be and what the threats were to it." — Warren Buffett: Used to show how supply-side durability, ecosystem strength, and capital allocation drove the investment case

Implications: Listeners should think less about quarterly forecasts and more about industry supply, replacement cost, and management quality. The framework favors patience, contrarianism, and selective concentration in businesses with durable moats or improving capital cycles.