We live in a new investment era where interest rates are very low, in some cases even negative.
In spite of very low interest rates inflation remains low, and again, in some countries we have negative inflation, i.e. deflation.
Assets are expensive and therefore their yields are low.
Last month, we saw the Feds do a u-turn from continued raising of interest rates to dropping interest rates by 25 points. We are also witnessing huge companies performing well, but give their investors nothing in return.
We all know Uber and I am sure that most of us have used an Uber either here or abroad. It is the biggest taxi service in the world, yet they do not own a single taxi! Also, although it appears to give a very competitive and satisfactory service it has never made a profit! I am sure the founders/managers are paid handsomely, and the drivers are paid their dues, but the investors have seen nothing but the continued losses that they finance.
Another example is Amazon. I am sure that most of us have ordered something from them. It makes big profits, but has never paid a dividend. The profits are re-invested to grow its operations. From a humble online book seller, it is now selling a host of products and is putting other entities out of business every day.
Unlike Rockefeller, Howard Hughes and Bill Gates who had their wings trimmed by Congress when they were getting too powerful for the liking of the US government, Mr. Jeff Bezos has not been challenged by the government, but by his wife, err ex wife! Still Amazon carries on unchallenged and we enjoy the simplicity by which it provides almost anything at a click.
In this new investment world that is fuelled by the internet, there are more choices, more so called analysis that can be good or misleading. With all this, the effective analysis can be quite shallow.
Constant research over time is required and that is what we do. One has to focus on long term values and not be led astray by short term noise.
With interest rates being so low in most developed countries, the SA Bond market has the potential to make big capital gains in the near future. That we will discuss in our next Newsletter when Moody’s reconsider our status.
Nick Russell
Certified Financial Planner CFP®
Please note: This article does not constitute advice