Our goal for Investment Perspectives is for it to be one of the ways that we communicate our thinking (past and present) to clients and the general public. We believe that investing is an iterative process and we know of no better way to test our own thinking than to share it with others. We encourage readers to send us their thoughts or questions.
Latest Investment Perspectives
“Interest rates are to asset prices… sort of like gravity is to the apple.”
– Warren Buffett, 2013 Berkshire Hathaway annual meeting
Paid to Wait: Starting Yields, Shareholder Returns, and the Paycheck Illusion
The third quarter brought a reminder of how much interest rates matter. Corporate America kept delivering, with S&P 500 companies on track for a third straight quarter of earnings growth above 25%. Yet much of the quarter’s attention went to the bond market, where yields climbed to levels not seen in more than two decades and the Federal Reserve raised rates for the first time in three years.
Higher rates are a mixed blessing. They raise borrowing costs for governments, companies, and households, and they weigh on the prices of bonds already outstanding. They also mean that savers are once again being paid well to wait. As Warren Buffett has observed, interest rates act on asset prices the way gravity acts on an apple, and this quarter that pull grew noticeably stronger.
Against this backdrop, this quarter’s Investment Perspectives explores three themes. First, what is happening in the bond market, why a difficult decade for bonds has created a better starting point, and how we think about owning them. Second, how companies return cash to shareholders, why the S&P 500’s dividend yield sits at a record low even as dividend payments set records, and what it means that some of the largest buyers of their own stock became issuers this year. Third, what we call the paycheck illusion: the tendency to treat income as free money, and the better question to ask of any yield.
What ties these themes together is a single question: where does an investor’s return actually come from? Income is one part of the return earned by owning productive assets at sensible prices, and this quarter the sources of that return shifted in ways worth understanding.