WARREN BUFFETT Quote : Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
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Thursday, January 9, 2014

The Higher the Rate, the Greater the Downward Pull

"I'm known as a long term investor and a patient guy, but that is not my idea of a big move."

    "To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter:
    "The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.
    "In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there – in that tripling of the gravitational pull of interest rates – lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere."