Interest rates have mugged shares… for now

If some share prices are at panic levels, that opportunity isn't going to be around for long.

A man sits nervously at his computer with his mouth resting against his hands clasped in front of him as he stares at the screen of his computer on a home desk.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Inflation.

Scary, huh?

Prices in the US are up by 8%.

9% in the UK.

Producer prices are up more than 12% in Germany.

Here?

5.1%. For now.

The last quarterly read was 2.1%.

If you annualise that… well, the US experience comes to mind.

And I have to say, there's no guarantee that it doesn't get worse from here.

I was talking to a mate on Saturday who has his own business.

He's seeing prices going up all over the place, particularly imports.

He reckons there'll be worse to come. I think he might be right.

If there's a good time not to be a central banker, it's right now.

It's also the time we need their expertise most, of course.

But it won't be easy.

We're still emerging from a pandemic.

There's war in Europe.

Shutdowns in China.

Ports are clogged and sclerotic.

We have the same amount of money, chasing fewer goods.

Is it any wonder prices are rising?

Don't get me wrong, I'm still an eternal optimist.

Our best days – as a country and as a system of democratic capitalism – are ahead of us.

But it might be a bumpy ride on the way, particularly this year and maybe next.

Right now, share markets are scared.

You only have to look at the indiscriminate selling of the shares of 'growth companies' to see that.

Sure, some businesses may not survive as prices rise and new funding dries up.

But the rest?

They're the babies being thrown out with the bathwater.

I was talking to another mate last week.

He mentioned a US company whose shares have fallen from 36 times revenue to 3 times, despite sales growth of almost 50% year over year.

Sure, that 36 might have been (almost certainly was!) a crazy multiple.

But 3 times?

The same business. The same growth trajectory. The same impressive outlook.

No, you shouldn't buy shares just because they're down – they can always go further (or, in a worst-case scenario, to zero).

But – and this is important – it's not the time to sit on the sidelines, or worse, to sell.

If inflation continues at these sorts of rates, your purchasing power is being eroded, almost daily.

If some share prices are at panic levels, that opportunity isn't going to be around for long.

Whether you're looking for income from your shares, or for the next 10-bagger, this is precisely the time you should be paying most attention.

But guess what?

Most people aren't. They're waiting for the good times to return first.

Good times? Like when that company's shares were at nosebleed levels and everyone was partying?

You can see the problem, can't you?

Oh, I'd love to wait until the coast is clear, too.

Wait for someone to yell 'Come on in, the water's fine'.

But you know who tried that? The people who waited, in March and April, 2020, for COVID to be over before investing.

And since then?

The ASX is up more than 50%.

Plus dividends.

I'm not Harry Hindsight, by the way. I was banging the table at the time.

How much will our purchasing power be eroded by the time some people decide to invest?

How far will share prices have risen before some people decide the water is calm enough to dip their toes in?

You know Warren Buffett, right?

He famously said that we pay a 'high price for a cheery consensus' in the stock market.

In other words, by the time everyone is feeling good, prices have already risen.

The time to buy is when everyone else is scared.

That's when prices are low(est).

Which is precisely how the most money is made.

Not in a day. Or in a week. Or even necessarily in a year.

Don't you wish you'd invested (more) in March 2020?

$10,000 invested then would be worth north of $15,000 today. Plus dividends!

Not bad for 26 months' (of no) work, huh?

And how far will retail prices have risen in the next 26 months?

What will that $1,000 buy you by then? Maybe something like 10 – 20% less?

Even if bank interest goes up a little bit, it's very, very unlikely to even go close to keeping up with inflation.

Can I guarantee that share prices will?

Nope.

But I can tell you that, over more than a century, Australia's share market has earned an average of 9 – 11% per annum.

Which beats cash in the bank. And, over time, should handily beat inflation, too.

It might be a bumpy ride.

It might fall further before it rises.

Those gains could take a while to come to fruition.

But I'm betting (literally; my entire retirement savings are invested in shares alone) that they'll come.

And when they do, that they'll beat inflation.

And I reckon history will show that a portfolio of quality businesses will have been a bargain in May and June 2022.

Some will do spectacularly well from here.

But you need to take action.

You know the overwhelming response I get from investors, in 2022, when we talk about March and April 2020?

"I wish I'd bought more"!

I'm not saying this is the bottom. If I did, I'd be guessing. So would everyone else (but they might be less honest about it).

What I am saying is that I think now is a great time to be buying (and/or holding) shares if you have a long term investing horizon.

I think there is an opportunity for the enterprising investor, if they're prepared to grasp the nettle and (to mix my metaphors) ride the waves.

The choice is yours.

Fool on!

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Motley Fool Take Stock

following famous investors in shares represented by pair of men's business shoes
Motley Fool Take Stock

The greats you should base your investing on

If I have a skill, or perhaps more accurately an ‘approach’ that works, it’s in doing my best to synthesise…

Read more »

Woman and man calculating a dividend yield.
Motley Fool Take Stock

We need to fix the economy. Here's how

I would ask that you put the political barracking and ideology aside for a few minutes here.

Read more »

The Australian Coat of Arms flanked by a kangaroo and an emu features as a fresco on a building with the backdrop of a blue sky.
Motley Fool Take Stock

My 2024 Budget verdict

That’s a lot of ‘stuff’ to take in. And the numbers are mind-boggling.

Read more »

A young couple sits at their kitchen table looking at documents with a laptop open in front of them while they consider the state of their investments.
Motley Fool Take Stock

What should be in tonight's Budget

Good luck tonight, Treasurer.

Read more »

set of scales with a house on one side and coins or asx shares on the other
Motley Fool Take Stock

Why 'Property vs. Shares' isn't a fair fight

But if you asked me to look at the probabilities, I know what I feel more comfortable with.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
Motley Fool Take Stock

Highlights from Buffett and Berkshire

You’ll be a better investor for spending a little time taking in Warren Buffett's investing wisdom.

Read more »

A man lies on his back with arms akimbo dreaming of big success
Motley Fool Take Stock

Oil! Get off the grass!

Now that I think of it, what is the bowls equivalent of Happy Gilmour?

Read more »

A businesswoman ponders why her boat is sinking in the ocean.
Motley Fool Take Stock

High inflation. Falling retail sales. Are you ready?

I’m sorry if this feels a little ‘doom and gloom’.

Read more »