I left off yesterday saying you simply must be in stocks if you want to protect your wealth over the longer term.
That might sound crazy given how volatile and risky stocks are. But it’s true.
In stocks, you may go broke if you buy the wrong shares and react emotionally to every major move in the market. But if you sit in cash waiting for Godot (the crash) you will go broke, slowly but surely.
By the way, we had one of the biggest crashes in history in March. Did the ‘waiting for stocks to get cheap’ crowd buy then? Of course not. When stocks ARE cheap enough to buy, it certainly won’t feel like the right thing to do.
It’s hard to make money from stocks. Worthwhile is never easy. Should you just invest in an index like Warren Buffett recommends, or take an active approach? Index investing isn’t really index investing these days. The US indices are heavily concentrated in overvalued tech. And active investing is full of landmines.
It’s enough to make you want to sit in the relative safety of cash.
Lower rates hurting banks too…
That’s until you realise central banks are waging a war on your wealth by giving you no return for holding cash.
Next week is a big week on that front. We have the Reserve Bank meeting on Tuesday (as well as the Melbourne Cup, and the US election). The RBA is expected to cut rates again, as they lead us down the dark and futile path of quantitative easing.
That lower rates hurt savers is a given. But now, there are signs it’s also hurting the banks. From The Australian:
‘ANZ chief executive Shayne Elliott has poured cold water on the prospect of any economic benefit from an expected rate cut next month, but expects the Victorian economy to snap back to life after the end of a punishing COVID-19 lockdown.
‘Ahead of a widely forecast easing in official rates and further monetary stimulus measures on Melbourne Cup day, Mr Elliott said the markets were already awash with liquidity.
‘“I’m not sold on the intended benefits — the cost of funding is not a binding constraint (on the economy),” Mr Elliott told The Australian.
‘Mr Elliott said the Reserve Bank and the big commercial banks had fundamentally different objectives, but it was clear that liquidity was “overwhelming”, and the price of accessing funds was “free or close to it”.
‘It was unclear what a further easing in the already rock-bottom cash rate of 0.25 per cent would achieve, other than a further compression in bank net interest margins — a key driver of profits.
‘Mr Elliott acknowledged that some people would say: “Who cares?” However, he said investors demanded a fair return and offsetting measures would have to be taken, with retail deposits likely to come under greater pressure as they became less valuable to the banks.’
Because banks are able to access more of their funding via the RBA, there’s less need for deposits. So savers will take another hit as banks look to preserve margins.
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Despite dripping in self-interest, Elliott is right. Liquidity isn’t really an issue. The cost of borrowing, on the surface at least, isn’t an issue either. But in an economy wrecked by a politically-driven response to COVID, who can, or wants to borrow right now?
I mean, small business doesn’t. And employment prospects and job security are pretty grim. If you’ve got a secure job, sure, you can borrow a motza. But that’s not the norm, is it?
All this won’t stop the RBA trying to do more to ‘stimulate’ the economy on Tuesday. But no one will stop to ask what their past attempts amounted to. Which is nothing.
Central banks around the world have run their economies into the ground. The RBA is simply following the same path. Because when you’re in a club, the pressure to conform is immense. It’s a clown show.
So, you can either think these people know what they’re doing and think your savings will preserve their (asset) purchasing power, or you can take steps to help yourself.
Good things often happen when you buy at the right price
As I said earlier, buying shares is risky. You need a plan. I like to keep my plan simple. That is, I like buying stocks that are good value (I use a discount rate, or a required rate of return of 8% to value consistent cash flow businesses).
This means that if the business hits its profit forecasts, you’ll receive an 8% return from the business, in the form of dividends or an increase in equity value. How the stock market chooses to respond to the underlying business performance is another question. But in general, over time, it should do well.
I recently recommended Coca Cola Amatil Ltd [ASX:CCL] to my subscribers, based on exactly this methodology. The shares had been hit hard. But based on expectations of a rebound in FY21, the valuation was attractive.
I had no idea a takeover offer was in the works. (This week, Coca Cola European Partners made a $12.75 bid for CCL.) The trade paid off much quicker than I expected. But good things often happen when you buy at the right price. And bad things often happen when you pay a crazy amount for a company.
So don’t be afraid to buy shares. Just make sure you have a plan and prepare mentally for the inevitable volatility.
Don’t forget, our offices are closed next Monday and Tuesday. So you won’t hear from us. But later in the week, I’ll be back with a three-part report to help you understand how our (broken) financial system really works.
Have a great weekend!
Editor, The Rum Rebellion