is capex good? no according to wsj chart

saw a very interesting chart (50 year span) that showed companies that had the lowest capex outperformed the most and vice versa implying most companies waste money. (low capex had about 6x the money at the end)

other highlights include caveats such as early capex makes sense, but as time goes on, more capex comes in lowering the future returns, and that amazon wont be affected since they invest their money on disruptive things like a 5 billion dollar hq. (im sure GE thought the same thing when they got a golf course, revolutionary really…)

low capex technology companies with high margins prob outperform high capex intensive companies with low margins, nah?

whats the measure. capex/cash flow, capex/market cap, capex/NI?

you’re very right. that was actually what munger said when he called al gore an idiot a while back.

the chart had no context as to capex ratio. just that it was discovered by kenneth french, from dartmouth!?!/ (thought he was from chicago)

Yeah, cluster the data in a list of industries and sub-industries and we see after.

Companies under perform because they do not realize returning cash to shareholders, or doing nothing, is better than growing for growths sake.

This makes sense to me, but I think you need to be cautious in applying this finding to future investments.

Compare Microsoft to General Motors. Microsoft doesn’t need huge factories around the world in the was GM does. So its Capex costs are much lower and its margins can be much higher (margins on MS Office and Windows are insane). So in general, if you can find a company like MS at attractive valuations then that is preferable to buying a GM or equivalent.

But (and here’s the caveat) what if you are comparing General Motors to Ford? If Ford gets a new CEO and announces that they are going to halve capex indefinitely in order to boost profit margins. Would that be a good strategy? Not necessarily, because five years down the line Ford might find itself unable to keep up with the new models, engines or technologies of its competitors.

So comparing all companies across all sectors, certainly low capex and high margin businesses are the best (as long as the valuation is reasonable). But when comparing within a sector, the company with the lowest capex isn’t necessarily the best.

Do you have a link?

You raise good points.

I think this goes to show that designing stuff is much more profitable then the physical act of assembling that stuff. The guy who figures out a way to add +10MPG to a car without sacrificing weight, saftey, power etc is much more valuable than the guy who is taking a door and attaching it to the body of a car.

However, there is value, for someone, who can find a more efficient way to produce said stuff but that ceiling is significantly lower.