We’ve been discussing what prospective stock market returns will look like, but here it is from legendary investor and Oaktree founder Howard Marks in his latest memo.
“As investments increase in terms of the level of uncertainty, an incremental ‘risk premium’ should be incorporated in their potential returns”
This means that the expected returns for bonds should be higher than Treasuries, that of stocks should be higher than bonds, and so on, in order to compensate investors for the increasing levels of uncertainty and risk along the spectrum.
He goes on to comment: “Low interest rates raise the DCF value of all investments… A low risk-free rate (30-day U.S. Treasury bill) brings down demanded returns all along the capital market line… The risk/return relationships among asset classes are still reasonable, but all prospective returns are much lower in the absolute.”
This is what we’ve been talking about for months. Low interest rates and the search for returns have pumped up valuations across asset classes. I wrote in Morning Cents yesterday (November 23, 2020):
“My thesis is that investors will have to settle for lower returns over the next decade than we’ve seen in the previous one, which is why, for discerning investors like us, it’s even more important to concentrate on outperforming sectors and stocks going forward rather than indiscriminately buying market ETFs.”
We’ll be searching for the best investments over the next decade here at Morning Cents and always put our favorite picks to own at any given time on the Big Board for ROIC members. We are hopeful and confident that our research and analysis will allow us to outperform (and continue our meaningful outperformance so far).