The higher the price you pay, the lower your returns
The higher the price you pay, the lower your returns. This is a fundamental truth of investing, a law, like gravity, and an impost that cannot be escaped. And yet it is always the case that when future returns are the least attractive, enthusiasm for assets is highest.
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.
Kelvin Ng
:
Hi Roger, this the latest from Ray Dalio. He says: “our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.”
https://www.linkedin.com/pulse/central-banks-reversals-signal-end-one-era-beginning-another-dalio?trk=mp-reader-card
Kelvin
Carlos
:
But do historical averages take into account the all time record low interest rates we have?
Max Zan
:
Hi Roger
Fully agree with you that the Australian Market is overvalued based on historical averages.
The below web site has some interesting statistics that tend to confirm/support that view
http://www.marketindex.com.au/statistics
Sharemarket returns are based on Dividends and Capital Growth . Going forward if the Australian market can achieve 4% in Dividends and maybe 2% to 3% Capital Growth in line with GDP growth rates, that’s probably the best you can expect. Imputation credits are a bonus on top of that. At an individual stock level things will always be different and opportunities will from time to time present themselves.
Based on the CAPM returns should equal long term risk free rate plus Equity Risk Premium. Assuming a normalized long term risk free rate of say 3 % and normalized ERP of 6% then sharemarket returns should be around 9% , but it looks like the Australian market will struggle to achieve 7% suggesting it’s about 22% overvalued based on normalized returns. It’s possible the market will stay overvalued for an extended period if interest rates don’t normalize anytime soon.
We live in interesting times.