You may have noticed that as of last week, we are back to regularly scheduled, twice-weekly programming here at Banker On Fire.
Two weeks in Spain flew by. It wasn’t a relaxing holiday by a stretch – a toddler, an infant, and a stream of work emails and calls saw to it.
No chilling out by the pool for yours truly.
And yet, it was still a fantastic break and a great change of scenery.
Surprisingly, the first week of quarantine has whizzed by as well, courtesy of work, post-holiday life admin, and some outstanding items relating to the property we bought last month.
If history is any indication, the four months between now and Christmas will go by just as quick.
Next thing you know, you are taking stock of 2020.
Hopefully, with a sense of content and achievement, and not a wistful recollection of resolutions given up way too early and time wasted away too easily.
What A Difference A Year Makes
This time last year, I was busying myself with some financial housekeeping.
I recall feeling frustrated with only getting a ~1.5% interest rate on the money in my cash accounts.
Little did I know of what was to come…
Asset classes across the board are now firmly in Bizarro land.
I had to give my eyes a good rub when I saw that less than six months after the near-total Covid meltdown, the stock market has notched up a new all-time-high.
Show me someone who saw THAT coming…
But in a way, should we really be surprised?
Sure, everyone is happy to point to the sky-high valuations of the S&P 500. I tend to agree.
A forward P/E of ~26 times sure seems a bit high, both on an absolute basis as well as relative to historical performance.
One counterargument is that perhaps the market isn’t pricing in next year’s earnings.
It could well be looking beyond the near-term collapse in earnings and taking a view that in two, three, or even five years, everything will be grand.
I have to admit, I like that vote of confidence in the resilience and enterprising nature of the human race.
The other obvious question we need to ask ourselves is:
What are the alternatives?
Bond yields are hovering around the zero mark.
This means that the P/E ratio of bonds ranges somewhere between 200 times (i.e. a hundred quid worth of bonds divided by the ~50p of interest they earn) and infinity.
When you look at it like that, retail investors should consider ourselves lucky.
Assuming we can still score a 1% interest rate on cash, we pay *just* 100 times every dollar/pound/euro of earnings.
Faced with options like that, paying 26 times for a dollar of earnings generated by 500 (mostly) quality companies sure seems like a bargain.
Which, of course, is exactly what the Fed and other central banks had in mind when they unleashed an unprecedented quantum of monetary stimulus across the globe.
Suffice it to say, the trick worked.
If you still find the stock market too racy but don’t feel like sitting in cash, there’s really only one (credible) asset class you can turn to.
(Mostly) circumstantial evidence suggests that property values have yet to reprice upwards in the same manner as equities.
There’s a variety of factors at play here.
Liquidity is one of them. Buying a house just ain’t as easy as loading up on Tesla!
The other one is uncertainty around commercial property prospects in light of Covid.
The residential segment will probably hold up, but who knows what happens to all those offices and restaurants?
The third one is the pure logistical challenge of acquiring real estate in a pandemic.
Finally, there’s financing.
My sense is that the banks have certainly got the message around lowering interest rates.
At the same time, they aren’t exactly running down opportunities to finance new property acquisitions, especially on the riskier end of the spectrum.
I suspect all four factors above will ease over the coming 6 – 12 months.
Inevitably, this will lead to an influx of money into real estate as an asset class, and boost valuations even further.
Nowhere To Run
All of this leaves us retail investors in a bit of a bind.
Moving money around cash accounts in exchange for an extra basis point of yield is like trying to plug a gunshot wound with a finger.
You may prolong the agony but will still bleed to death, courtesy of inflation.
Bonds will give you the downside protection if the stock market corrects, but not much in terms of upside.
Hence, equities represent the only way forward for the majority of investors.
The good news is that some subsectors of the equity market will continue growing their earnings at a meaningful clip going forward.
Make no mistake, tech companies like Microsoft, Shopify, Slack, and Twilio will continue to do well. There’s too much wind in their sails.
Part of the reason investors are willing to pay so much for them is the expectation that these businesses will eventually “grow into” their multiples.
Equally, reversion to the mean suggests valuation multiples will come down eventually. This will create an offset to the earnings growth.
The problem is staying out of the market until that happens is a strategy with a negative expected value. Just ask anyone who went to cash in March.
The Best Investment
There is, however, one asset class I haven’t yet mentioned. It’s you.
The obvious way to offset a reduction in risk asset returns going forward is to make more money.
Now, it may seem like a crass thing to say in an environment where millions of people are out of work. There’s no doubt that the next few months and years won’t be easy for a big swath of the population.
Those who still have a job should consider themselves fortunate.
Equally, every crisis presents an opportunity.
An opportunity to wipe the slate clean. To go back to school, or simply re-train.
To move cities and countries in search of a better long-term outcome.
And that applies to everyone.
In the few moments of peace and quiet I did get while on holiday, I identified three areas of personal development I am going to focus on starting in September:
1. Broaden my sector coverage at work
With all the disruption that’s going on, clients have been increasingly turning to bankers to help them navigate the new reality. It’s an opportunity I want to capture as I continue rising up the ranks.
There is an inherent investment of time and effort involved in learning about new industries and companies – and building up the relevant network of contacts.
That being said, I am confident it’s worth the effort.
2. Scale up our property investments
Yes, it’s time-consuming and quite frustrating at times.
And yet, not only it represents one of the pillars of our financial independence strategy, but it’s also an area I can see myself spending a lot more time in post “retirement” (whatever that means).
3. Continue growing Banker On FIRE
It’s been less than a year and a half out of the gate, but I am happy to say that this blog has been gaining some decent traction.
Earlier this summer, we had our first day with 10,000 pageviews.
As far as hobbies go, it can sure feel like a time-consuming one.
And yet, it’s a process I find it ever more enjoyable, in particular when I get to engage with readers in the comments section.
In addition, I am sure that in today’s world, a set of my newly-found digital media skills won’t go to waste.
The post-Covid world of high asset prices, zero yields, and ballooning government deficits isn’t an easy place to live.
The good news is that self-development is an option that’s always on the table.
About Banker On Fire
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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
Find out more about me and this blog here.
If you are new to investing, here is a good place to start.
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