In the real world - asset allocation

itwasntme001

Deleted_User said:

Some redistribution will happen. Both between countries and within.  So far older people with assets benefited but younger, asset poor people did not. As retirees are selling off shares and houses, youngsters will have to part with more of their salaries (which have not risen) and take on more debt. Older people who kept their assets in cash have missed out too. 

At some point inflation may rise, assuming there is no long term economic damage and confidence comes back.  Thats not a problem for people with assets.
Last but not least, taxes will rise.  Under all scenarios. And that will impact people with assets. 

In summary, I see valuations as real but there will be some financial pain for most of us in the not too distant future. 

Many young will set to benefit from their parent's wealth due to gifts and inheritances.  As a beneficiary of this, I hope that the old do not get taxed punitively as it will mean less for me.  But wealth taxes are the right thing to do given the debt burden we all face.

itwasntme001

Linton said:

itwasntme001 said:

Linton said:

Deleted_User said:

Valuations are based on projecting profits and growth to infinity, although future returns are assumed based on terminal value - and discounted.  

If only valuations were based on projecting profits to infinity!  Many high value share prices now are valued on the likelihood the buyer feels that they will be higher price next year (or rather perhaps next week). Then we have a positive feedback loop driven by supply and demand. Just like Bitcoin. 

Valuations should be and are based on cashflows out to infinity - equities are the longest duration asset class there is.  Stocks maybe moving up and down in price due to supply and demand but ultimately stock prices are just the discounted sum of future cash flows.  Nothing more.

That is why at the extreme of 0% interest rates or thereabouts growth stocks rise disproportionally in price higher because the value of the longer dated cash flows (where growth stocks have much of their value) go up a lot more.  Conversely they will fall a lot more as well once rates start to rise.

Hence stocks like Amazon and Tesla has done so well (along with their growth prospects also rising too).

That is the traditional theory.  It makes sense. But in practice it is pretty irrelevent.   If you look on the Tesla thread I have not found a single posting out of the currently 354 posts that mention this (not that I have looked too thoroughly), never mind carrying out a DCF to infinity.  For how many of the people who doubled the price of Uber was profits to infinity a consideration?  If a price is going to double in the short term, who cares about the long term?

Unfortunately we have to live in the world as it is, not as it should be.  

In practice for many "investors" they CHOOSE to make it irrelevant, especially, perhaps, for stocks like Tesla.  The thing is you can still do a DCF to arrive at the current price for Tesla - it's just that your assumptions MAY BE aggressive for variables such as profit margin and revenue growth.

Investors such as those who run SMT would be doing some sort of valuation analysis (as expected); they sold some Amazon (and Tesla) recently on valuation grounds, but they still own a huge chunk in these companies.  They appear to think they still have room for upside albeit with smaller return prospects than previously.  But it is a high risk strategy they run as SMT can easily drop 50% with rates going from 1% to 2% with no material changes in prospects for the companies it owns.

[Deleted User]

“ But wealth taxes are the right thing to do given the debt burden we all face.”

UK will be desperate for investments over the next little while. Taxing assets might be counterproductive. But taxes will have to be raised somehow. 

itwasntme001

Deleted_User said:

“ But wealth taxes are the right thing to do given the debt burden we all face.”

UK will be desperate for investments over the next little while. Taxing assets might be counterproductive. But taxes will have to be raised somehow. 

Investments have been falling for quite some time in the UK and much of the Western world.  What will suddenly drive investment going forward?

The only thing is opportunity, and right now I see very little opportunity to make an adequate return and low interest rates are simply a symptom of this.

Wealth tax would therefore not be a problem for investments in the UK.  We've had much more investment in the UK at times when there was not nearly as much wealth inequality as today.

itwasntme001

I would argue that the only way for investments to boom in the UK and the Western world is for creative destruction to occur.  Jack up interest rates, kill the zombie companies, re-distribute wealth via changes in the tax system and then and only then will you be able to free up capital to be incentivised to invest into more productive businesses that can raise the living standards for us all.  Short term pain for long term gain.

JohnWinder

michaels said:

So my question is what assets should we invest in to protect the current 'real' value of our inflated financial asset pots from whatever form the inevitable reduction in real value takes  (inflation, asset price fall etc)?

I would think that the answer is no different than it would have been to the same question asked two, ten or thirty years ago. Inflation and asset price falls etc are always risks investors face. Nothing has changed except that returns in the short to medium term seem likely they will be less than the long term trends have been. But individual real estate property is still undiversified and a lot of hands-on work; private equity is still opaque and high fee; infrastructure still has low liquidity; bonds still carry credit risk; precious metals still have no yield; stocks can still depreciate for many years.

Surely, whatever was a suitable choice for you in the past remains a suitable choice. To look for higher returns likely means taking more risk, as always.

cfw1994

Mrs_Z said:

hmmm... i'm still not sure... where there's demand someone will come up and fill that demand with goods or service as there is usually a profit to be made (law of supply and demand).
Equally, many businesses are very clever nowdays in creating demand where there wasn't one to start with - examples - have you ever gone to IKEA for 1 thing and come back with another 10 items that when in store, you realised were so essential that you could not leave the store without them, yet they were not on your shopping list when you went to the shop.  Another one, Amazon & Amazon Prime... when our company relocated to another country in 2019, no1 concern for people was that the new country did not have Amazon/Amazon Prime and they could not get their orders the next day.... never mind the children's education, housing, etc!
One constant in life is change (& taxes), business will go out of business for whatever reason and new ones sprout.  Humankind is very adaptable to the circumstances.  

I’m mostly curious about which Country your firm moved to that was bereft of Prime 

[Deleted User]

itwasntme001 said:

Deleted_User said:

“ But wealth taxes are the right thing to do given the debt burden we all face.”

UK will be desperate for investments over the next little while. Taxing assets might be counterproductive. But taxes will have to be raised somehow. 

Investments have been falling for quite some time in the UK and much of the Western world.  What will suddenly drive investment going forward?

False.   In much of the western world investments have been rising in real terms and remained stable as a percentage of GDP. https://www.ceicdata.com/en/indicator/united-states/investment--nominal-gdp