Is the Stockmarket in a bubble?

bowlhead99

Radiantsoul wrote: »

Presumably higher interest rates would cause the discount rate on future income to decline and so lower share prices

deadpeasant wrote: »

Could someone please unpack that for me? What is the discount rate on future income? Thanks

Glen_Clark wrote: »

That has got me foxed too
I wish people would write like Warren Buffet does. No buzzwords, No fancy jargon, just simple words even I can understand

This comes from the fact that you value a company by what you will get out of it in the future - whether that's by the profits it receives from now until the distant future, or just literally you as an investor taking annual dividends from now until the distant future.

When you're doing this, you don't just say I will get its annual profit for a million years so I value it at a million times its annual profit. A pound in ten years or twenty years or a million years is not worth as much as having it today. So you 'discount' the future years' income.

The rate that a company discounts projects or an investor discounts future dividends is related to their 'cost of capital' or how expensive it is relatively to make the investment over other alternatives (not borrowing money for investment, or picking a different investment, etc).

If interest rates are low (ie risk free returns are nothing), demand for investments in companies will increase, because it is the only way to get returns. So this would be good for company valuations. However if the interest rate was higher, you would need to discount those future returns quite significantly. The rate at which you finance your investment is higher, so the same amount of expected profits is going to be worth relatively less in today's money.

You would want more dividends and profit expectation in order to value the company the same. And if you demand more dividends and the banks demand more interest, the company will experience a higher cost of capital for any projects they want to undertake, which makes it harder for them to keep bringing in the profits. Ultimately companies might achieve lower valuations in a high interest rate environment.

Does that cover it, without being too patronising?

merlingrey

purch wrote: »

If you think that Buffett talks in simple straightforward terms you clearly do not understand what he is saying

He is a master at hiding his real intentions

You don't get as rich as he is by telling everyone what you are doing and why you are doing it

People that talk about it in simple terms annoy me too.

Understand that he had a consortium of investors and essentially bought a failing textile business and turned it into a sort of hedge fund firm by winding down the whole operation and extracting the cash resource to buy stock on open markets of other companies he saw as good long term winners, nothing simple about that.

What people get wrong is what he says about value investing, they think that buying a company's shares down on their luck will win them gains. As if that was all there was to it.
I saw people do it with HMV and Game Group.
People spouting "buy when others are fearful"
Yeah they was fearful for good reasons.

You could see a business like Game group and decided to buy the whole thing, but you'd have to have done it before it turned toxic and managed it better than them.

Sometimes value means winding down a business and taking the cash component, you cannot do that by just buying a couple of shares.

Glen_Clark

purch wrote: »

You don't get as rich as he is by telling everyone what you are doing and why you are doing it

Of course not.
I was just making the point I have never heard Warren Buffet use buzzwords and fancy jargon to try and look intelligent, as some people do.

gkerr4

merlingrey wrote: »

What people get wrong is what he says about value investing, they think that buying a company's shares down on their luck will win them gains. As if that was all there was to it.
I saw people do it with HMV and Game Group.
People spouting "buy when others are fearful"
Yeah they was fearful for good reasons.

well said!

gadgetmind

Buying when others are fearful works but only if you buy good companies and not junk.

merlingrey

ScottWhiliams wrote: »

but its not as simple as do the opposite of what he says?

You don't do the opposite or do what he does, i mean it's quiet simple really if you want to track buffett set up international trade with your broker and buy Berkshire Hathaway B shares.

Anybody can do that.

merlingrey

ScottWhiliams wrote: »

You wouldn't do very well, compared to many things. Gold and silver for instance have smoked Berkshire Hathaway the last decade.

If you just bought gold and silver bars and keep them under your bed you would have done a lot better return.

I know, you have to do your own thing.

Hedging with gold, sure but keep that to yourself and in a bolted down safe.:D

Gold could have a bad run, it's a currency hedge and a commodity not a business.

atush

gold has had bad runs in the past, incl when my parents were investing in it in the 80's. Had to sell it at a loss when I would up the estate in 2001.

Gold under your bed only makes money if someone doesn't burgle you.

grey_gym_sock

i'd certainly sleep a lot more soundly if my money was in berkshire hathaway shares than if it was in gold (even ignoring whether it was kept under the bed).

cepheus

The Mail's view for what it's worth

Stock markets are generally regarded as a significant indicator of the economic future, often rising six months to 18 months ahead of a full recovery.

But they are not infallible. The Nobel-prize winning American economist Paul Samuelson famously quipped that the ‘stock market has forecast nine out of the last five recessions’ – a testimony to its historic unreliability. Nevertheless, the move of smart money out of cash and bonds into shares ought to boost the investment returns of all of our long suffering pension funds that have been badly holed by a long period of low interest rates.

It should also underpin the confidence of business. The higher the share price the more freedom directors have to plan investment and recruit staff.

For the moment the recovery is being stimulated by the financial ‘cocaine’ of low interest rates and printing of money.

The test will come when central banks decide this help is no longer needed.