Zero Rates for Another Three Years — Reduce Risk In Investing

You may have noticed I’ve been a little more absent than usual in these pages over the past couple of weeks. That’s because I’ve been working on a new project.

It’s a new service called Greg Canavan’s Investment Advisory. The idea behind it is to provide recommendations predominantly from the ASX 200. It’s designed for those managing larger sums, like superannuation accounts.

The thing is, with interest rates at zero and savers getting absolutely screwed on their deposits, the stock market is really the only game in town for longer-term wealth creation. It always has been, but now it’s even more apparent.

You WILL go backwards if you sit in cash long term.

That’s not to say you won’t experience gut-wrenching corrections and volatility. It’s the price you pay for playing the game and ensuring you don’t suffer from negative real rates.

And just to be clear, rates are likely to be negative for some time to come. As the Financial Review reported following the RBA’s monthly meeting earlier this week:

Three ‘Deep Value’ Stocks to Watch as the Market Recovers. Discover More.

The Reserve Bank has held the official cash rate at 0.1 per cent and maintained the size and parameters of its $200 billion quantitative easing bond buying program.

The central bank said it had “brought forward” some bond buying this week to restore functionality to the bond market which had experienced a sell off last week.

‘“Bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market,” governor Philip Lowe said in his statement.

‘“The bank is prepared to make further adjustments to its purchases in response to market conditions.

The bank said it would maintain “highly supportive” monetary conditions and that the Board still did not expect the cash rate to rise until 2024 “at the earliest”.’

So you’re looking at another three years of this, and probably longer.

That’s why I decided to launch this new project. I wanted to offer you a way of investing that tries to reduce risk as much as possible. The thing is, zero rates and government intervention create risks. You need to counter that as much as possible.

So what do you do when you need to invest in the market, but you don’t want to take crazy risks? That’s the problem I’m trying to solve for you. I’d really appreciate it if you check out my free event, ‘Life at Zero’, and see for yourself whether you think it could benefit you.

The funny thing about nearly free money is that it leads to intense speculation in certain parts of the market. But other parts (many of the boring, traditional stocks) are actually pretty good value. By looking at earnings and cash flows and using a conservative discount rate to value these earnings, there are plenty of stocks out there that should deliver you a solid long-term return.

Yes, there will be volatility and yes you need to accept that and deal with it. But there are definitely good value companies out there right now, despite the feeling that everything is crazy and overvalued.

It’s simply not.

I think it’s just a matter of staying away from what’s hot and popular, and looking closely at what’s not and seeing if there is an opportunity.

That’s not to say you need to be a ‘value’ investor to reduce risk. There’s a problem when you label things like ‘value’ or ‘growth’. Being a slave to a label can get you into trouble.

For example, buying a stock just because it has a low PE or low price-to-book doesn’t mean it’s good value. There’s just as much chance that it’s a value trap. Similarly, buying a stock because it has demonstrated high rates of growth (whether in the form of revenue or earnings) can be a growth trap if, for whatever reason, that growth cannot be maintained.

The truth is, investing is hard today. Much harder than it has been in the past. That’s not just because of the risk of unintended consequences from governments meddling in a broken financial system.

It’s because technology has commoditised information to such an extent that there is no edge to investing based purely on number crunching. It’s often said that investing is part art, part science. That is true. It’s just that the outperformance these days, the ‘alpha’, comes from the art, not the science.

Everyone has the science down pat. If you’ve got a data feed, access to the financials and the charts, you have the same information as everyone else. There is no advantage in that. The value of your approach comes in the thinking.

Howard Marks of Oaktree Capital, wrote about this in his recent memo. I would encourage anyone interested in the art of investing to read it. It’s long, but here’s a snippet:

In the past, bargains could be available for the picking, based on readily observable data and basic analysis. Today it seems foolish to think that such things could be found with any level of frequency. If something about a company can be easily read in an annual report, or readily discovered by a mathematically competent analyst or a computer, it stands to reason that, in most cases, this should already be appreciated by the market place and thus incorporated in the prices of the company’s securities. That’s the essence of the Efficient Market Hypothesis. Thus, in the world we live in today, investing on the basis of rote formulas and readily available fundamental, quantitative metrics should not be particularly profitable. (This is not necessarily true during market downturns and panics, when selling pressure can cause prices to decouple from fundamentals.) It also stands to reason that in a time when readily discernable quantitative data is unlikely to produce high-profit opportunities:

•if something carries a low valuation, there’s probably a good reason, and
•successful investing has to be more about superior judgments concerning (a) qualitative, non-computable factors and (b) how things are likely to unfold in the future.

In other words, the value is in the thinking and the process that informs your thinking.

If you’re interested in my thoughts about how best to navigate a future of zero rates and constant meddling, check out my special event, Life at Zero.

To get access, go here.


Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

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Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

Learn more about Greg Canavan's Investment Advisory Service.

The Rum Rebellion