Interest Rates & Macro Economics
At Old School Value, we are looking to buy great businesses. If buying a great business is the objective, interest rates and macro economics should not affect your overall decision. Lately, the fed has been slashing rates and although it may provide a quick 1 day rally, it is short lived and forgotten. Buying stocks on the assumption that prices will rise due to a rate cut is pure speculation.
There are two times in a man’s life when he should not speculate – when he can’t afford it and when he can. – Mark Twain
How Do Interest Rates Affect Businesses?
Let’s start with an example. You are eating a hamburger at Macdonalds and you receive news that the fed cut interest rates by 1/2 a point. Do you immediately feel that the burger you are eating has suddenly become much juicier and succulent? Or do you just continue to eat?
On your way out, you ask how the manager or an employee how the interest rate has affected their business. The employee looks at you in a funny way, looks at the line of people and continues with their work.
No matter what the interest rate is, businesses will continue its operations. An interest rate rise of cut will not affect the overall performance of a company. When it comes to giant institutions, rates will definitely have an effect on financing etc, but when an investor is considering the purchase of a business, it has no adverse affect.
How Do Interest Rates Affect Investors?
Unless you are into real estate, refinancing your car, borrowing your money or choosing a savings account, interest rates have no bearing on the companies outlook or performance.
Interest rate cuts are noise. Don’t focus on what the gamblers do. Don’t focus on what Wall Street does.
I don’t read economic forecasts. I don’t read the funny papers. – Warren Buffett
The recent sell off in August 2007 and December 2007 caused the majority to panic and unload their stocks. The fed, trying to save the economy, slashed and slashed rates. What did it do for the market? Not much. For the economy, it may have done something.
A few days of rallying eventually led to more declines and the market is back to where it was before the cuts. Mr Market with his case of amnesia has already forgotten about the cuts. Rate cuts only intensifies the greed and emotions of gamblers.
Some are macro nuts and believe it affects everything. Maybe that is true to some degree. But the important thing is that it is not 100% correct. The difference between sometimes and always is night and day.
My fourth criticism is that there’s too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It’s like trying to learn medicine without knowing anatomy and chemistry. – Charlie Munger
The Really Important Stuff
Based on my own personal experience – both as an investor in recent years and an expert witness in years past – rarely do more than three or four variables really count. Everything else is noise. – Marty Whitman
If we don’t think interest rates are important, then what is?
- Buying quality businesses
- Buying quality businesses with a margin of safety
- Buying quality businesses with a margin of safety at a great price
The concept is simple but practice requires discipline.
Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. – Warren Buffett
Businesses will operate regardless of the interest rate, employees won’t feel any different because the rate has been cut, customers won’t enjoy the products more because the rate has been cut. So why worry about interest rates? If we do need to worry, worry that the interest rate will not stay at its current level. It will rise sharply one day. Also, how about worrying about the weakening dollar and the growing trade deficit…