Hope for a bonus or fear a setback?

update week 38 2024

This week's economic news seemed to revolve around the interest rate decision by the FED (the U.S. central bank). Would they lower rates, and if so, by 25 or 50 basis points? It ended up being 50 basis points.

The stock markets surged in response to this decision, with the belief that more liquidity is good for the markets.

Of course, this is all short-term thinking. The real question we need to ask is whether this rate cut has a significant impact on the underlying businesses.

Interest rates are important, of course. They are part of the costs for companies with debt or a source of income for those with a net cash position.

If you can get a 3.5% return on a U.S. government bond, you’ll naturally want your real estate or stocks to generate an even higher return. This affects valuation models. Personally, I always work with a minimum return requirement of 10% or more, so a rate cut doesn’t impact my valuations.

The key question remains: what impact does this rate cut have on our companies? If you look at our real estate companies, you might think the impact is huge. If America cuts rates, Europe and the UK will likely follow. But in reality, the impact is less significant than you'd expect. Only if there are several large cuts in a short period there is a quicker effect.

However, a rate cut doesn’t happen without reason. It’s usually a sign the underlying economy is underperforming. We’re seeing this now in both the U.S. and Europe. The results from retailers paint a picture of consumers struggling or at least being more cautious with their spending. This is a much more important factor than whether rates are a half percent higher or lower.

In Europe, we also face self-inflicted issues, such as overregulation and the Green Deal, which makes everything more expensive for consumers. High energy costs are also weighing heavily on industry and competitiveness.

Should we sell everything and invest in gold? Not for me. Stock prices, especially in Europe, seem to already account for these factors. Plus, if a company can survive, and even grow, in this environment, imagine what it could do when political policies shift away from the current "degrowth" mindset.

As an investor in companies, you have to be an eternal optimist. With every business you own or want to buy, you must know what can go wrong and what the impact would be on its value. "Expect the best, prepare for the worst."

There are always companies on the stock market where almost everything could go wrong, and you still wouldn’t be overpaying. How can you not be optimistic? Anything better than your worst-case scenario is profit.

Unfortunately, there are also many companies where the opposite is true. In those cases, optimism has turned into unchecked euphoria. Everything has to go perfectly to justify their valuations, and if something goes wrong, the value drops significantly.

As a noted optimist, I choose companies we can buy where a lot can go wrong. That way, every positive surprise brings joy, and that’s much more enjoyable than constantly fearing something will go wrong.

Update this week: