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When investing, assess supply side and not demand side

Even Charlie Munger admits that investing is not easy. But it can be simple if one knows some basics well. I usually have a big pile of books pending a read - a good one in the current pile, which is also my recommended book for 2017, is 'Capital Returns' by David Chancellor. It is a compilation of investor letters by Marathon Capital and I think it is probably one of the 'must read' books for a value investor. I would go to the extent of saying it should be one of the first 10 books you must read as an wannabe investor - it will save you a lot of pain !
The key method put forth by D. Chancellor in this book is called "Capital Cycle Analysis" and he emphasises the value of looking at the 'supply side' in an industry instead of the 'demand side'. A key recommendation of 'capital cycle' investing is to invest into industries from where capital is exiting (i.e., when you see news clips about consolidation/M&A in an industry, sell off of distressed assets, etc. - Indian steel sector today, possibly Indian telecom too?) and to exit from industries where lot of capital is flowing in (e.g., X company plans to raise USD 1.5 bn, Y company to invest in greenfield capacity, industry to invest USD N bn to increase capacity to YYY Metric Tonnes by 2020, etc.).
It is good to remember that these cycles keep happening all the time and also that even amidst these cycles, some companies (who are cognizant of these cycles) will buck the trend. [See this also in the context of my previous article on buybacks - managements which get bullish and buyback when their stocks are hitting all time highs aren't being wise with capital allocation.]
Where lot of capital is flowing in, competition is naturally bound to diminish margins and oversupply reduces prices - net effect being to erode return on capital. Conversely, where capital is fleeing and existing capital is being better allocated (sounds similar to Tata's Chandra's recent statements?), as an investor you stand to benefit significantly. [In this context, suggest a read of the book 'The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success' by William N. Thorndike]
So that's the nugget on investing for this week. Keep learning, keep thinking !
Note: These notes are meant for an individual investor who has a multi-year investment horizon and who invests only in publicly listed equities. I know nothing about institutional or private equity investing since I usually like to own what institutions don't own. So institutional and private equity investor perspectives could be quite different.

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