One of the biggest economic and financial talking points around the proverbial water cooler over the past 12 months or so has been interest rates. The decision by the Reserve Bank of Australia (RBA) to ratchet up the cash rate from a historical low of 0.1% early last year to the current 4.1% has been the steepest increase in rates in history.
This has had profound impacts on the financial landscape, with borrowers and mortgage holders in particular under increasing financial strain. In addition, ‘safe’ investments like term deposits and government bonds are now offering returns not seen in over a decade.
You might be forgiven for being anxious about what this might mean for the share market. For once, high interest rates have often been one of the causes of a recession in the past. And we also looked at legendary investor Warren Buffett’s views on how rates affect the share market over the weekend.
But perhaps investors should be so anxious. Rates can and do affect financial markets, including the stock market. But Recently, The Motley Fool’s own Laura Stewart looked at another legendary investor’s views on ‘macro factors’ like interest rates.
Why ASX investors shouldn’t care about interest rates
Howard Marks is, behind perhaps only Buffett, one of the world’s most respected investors. He is a hedge fund manager and founder of Oaktree Captial. Laura analysed Marks’ thoughts on interest rates and why they shouldn’t bother investors like you or me. Here’s what she wrote:
Over the short-term, Marks suggests the majority of investors fail to predict macroeconomic events, and have even less chance accurately predicting the market’s reaction to them. And more importantly, they are even less likely to accurately predict this on a consistent basis.
Therefore any success of this strategy is more usually attributed to luck and not skill. So, predicting macroeconomic events (including interest rates and inflation decisions) should not be the focus of investors.
Mr. Marks also explored trading mentality. Specifically, that investors have increasingly come to consider stocks as a tool for profit, rather than fractional ownership of a business. According to Mr. Marks, investors should think of buying shares in terms of acquiring partial ownership in that company, and only buy into businesses they wish to own.
Prudent advice indeed. While interest rates can and do have impacts on the share market, it’s safe to say that being able to anticipate and profit from these impacts is a game that is out of the remit of the vast majority of investors.
Neither Buffett nor Marks advocates that anyone should buy and sell shares based on interest rates, inflation, economic growth or any other economic statistic. What’s far more important is finding a quality business that sells goods or services that people love and cannot do without. All you have to do then is buy it at a price that makes sense.
As Buffett once said, “I don’t pay any attention to what economists say, frankly… You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No”.
