Django Davidson: Avoid The AI CapEx Bubble; Buy This Needed Resource [European Value Investing Conference]

Django Davidson, Portfolio Manager and Founding Partner of Hosking Partners, presented his firm’s core investment philosophy at The Ben Graham Centre’s 5th European Value Investing Conference on the panel titled “The Capital Cycle: Avoiding Bubbles and Un-Earthing Gems”. Davidson’s main thesis posits that investors must look beyond short-term earnings and focus instead on the return on capital, arguing that the capital cycle invariably runs ahead of the business cycle. By adhering to this simple but powerful framework, investors can avoid sectors overwhelmed by capital expenditure - such as the current AI boom - while simultaneously identifying scarce assets where capital constraints promise exceptional long-term returns.

Also see our coverage of the 2025 Ben Graham Conference, 2025 Morningstar Investment Conference and the 2025 Value Investing Seminar.

The Capital Cycle Framework: Focusing on Returns, Not Hype

The capital cycle provides a powerful framework for making investment decisions by maintaining sensitivity to how returns on capital are evolving within industries. In capitalist economies, periods of optimism - driven by new innovations, promoters, and investment banks - lead to capacity expansion. All else being equal, increased capacity reduces the returns on remaining capital. Conversely, when cycles mature and investors withdraw funds, capacity consolidates, and returns can improve. Davidson emphasizes the long-term perspective: "over the long run, it's the return on capital that determines a company share price". The stock market acts as an amplifier, driving valuations higher when returns are strong, which in turn rationalizes entrepreneurs raising more capital and digging more "holes in the ground". The ultimate goal of the framework is to enable contrarian decisions, requiring investors to be not just contrarian, but contrarian right.

Avoiding the Contemporary Bubble: The AI Capital Boom Paradox