The weight of money entering the markets

The cost of money is exceptionally low, and the returns being generated by most investors in the traditional term deposits or fixed interest, or even property investors, is just ridiculously low. This is already taking into account the fact that inflation is almost 2% and the yields you’re getting on these investments, particularly term deposits, is substantially below that. So the real value of your money is actually declining.

SO WHAT DO YOU DO?

Well, we think it’s never been more important to have discipline and deep research into finding that arbitrage of mispriced stocks with good outlooks, backed by very solid business models, and competent management.

It’s important to know that everybody’s feeling this pain. Everybody has FOMO, and so the weight of money moving out of term deposits, where retail investors are squealing, they need returns. You can see the weight of that money coming into the market: a lot of it through ETFs, and that’s why January has started with a bang, as money tries to squeeze its way into both the Australian equity market and generally around the world.

Now, we’ve had some hiccups, with the coronaviruses and the bush fires etc, and still the ever-present weight of money forcing its way into the market continues to drive equity prices higher.

In such conditions, an investors job is to find safe investments that will continue to generate decent returns, while maintaining capital preservation.

SO HOW CAN AN INVESTOR DO THIS? WE BELIEVE THIS CAN BE DONE BY ADOPTING A BALANCED APPROACH.

As always, we like to have some powder dry for opportunities to present themselves. Secondly, we like to have some insurance by buying puts and thirdly, and probably most importantly, we like to be disciplined about the businesses that we own. They need to be economically insensitive, and we’ve seen that, as the coronavirus hit equity markets, our portfolio stood up exceptionally well, because they’re not economically sensitive businesses that we own. They have power over their suppliers, their customers, their competitors, their stakeholders, and it’s this focus that has allowed us to preserve capital every single year for the 12 years since inception, and generated our 10% + return per annum. We hope to continue doing this, and we think it’s still possible.