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The higher the price you pay, the lower your returns

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. 

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice 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 advice from a financial advisor if necessary.

3 Comments

  1. But do historical averages take into account the all time record low interest rates we have?

  2. 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.

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