Cash just won’t cut it; focus on companies that are growing
Make no mistake. The good times are over. That’s about as succinctly as I can put it. From now on returns from property and stocks in aggregate will be mediocre. Of course, the very best quality companies and properties will produce better returns but the averages, as measured by the All Ordinaries and median house prices, will disappoint.
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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Joseph Rich
:
Thanks for the response Roger
Joseph Rich
:
Great article Roger, as usual! 2 quick questions:
1. You mention that we must be invested, and cash won’t offer sufficient return to protect purchasing power. While that’s certainly true of the medium-long term, shouldn’t we be shifting increasingly towards cash in the short term, in an environment where high growth, high quality companies and significant discounts are increasingly rare? In other words, cash will provide liquidity for future bargains when the ’bouts of panic’ occur (and they look primed to occur soon)?
2. You mention that high asset prices make returns low, and unattractive relative to the low (albeit safe) returns on cash/TD’s. While this explains why buyers of assets aren’t willing to invest more in stocks, it doesn’t seem to explain why companies aren’t investing more. Surely, if I was the CEO of a high quality company earning 15+% ROE, the returns on incremental investment within the company would be much higher than what would be achieved if I held back and kept surplus funds in cash or payed out as dividends (i.e. my stockholders invested in cash)? The stock price of my company may be overvalued (and hence the returns earned by investors may be low due to high purchase price of shares), but at a company level, the returns are still attractive relative to other options? Or am I missing something?
Roger Montgomery
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In answer to your question 1) We do believe that cash is the best security to invest in when suitable alternatives are unavailable. In answer to question 2) Interest rates act like gravity on asset prices and when interest rates are low there is less gravity. Ipso facto, asset prices go up, reducing the returns available to companies wanting to acquire those assets as an investment. if the stock price is also high then arguably using stock to make the acquisition could provide some compensatory benefit but the seller needs to be willing to accept a lower potential return too.