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In reality, interest rates are not going to double in the short term, and I doubt they would rise drastically in the near term. The basis of my argument was that if interest rates were to rise, it would affect the day to day business of some companies,(eg. J.P Morgan - who use borrowed captial as inventory) but will not affect Microsoft as such. Microsoft is currently on an embrace and extend mission with the internet and world wide web. This is not cheap. Many companies must borrow or offer equity for acquisitions and R&D, MSFT uses cash. A short term rise in interest rates, that lowers general stock prices for a short horizon would not adversely affect MSFT's campaign (since it uses neither debt nor equity as currency), actually lower general equity valuations would actually help MSFT affect acquisitions at more economical levels, hence my recommendation to consider a short term correction in MSFT as a buying oppurtunity. If MSFT continues on it's current path, it will continue to create value, regardless of short term swings in interest rates. Investors must make decisions on the company itself (as well as the company's environment and prospects) and not necessarily on what the market says the company is worth for right now, (unless P/E's are astronomical). As stated before, the market is not truly efficient, nor perfect, and many things affect short term prices that are far from fundamental. Warren Buffet does not pull out of Geico or Berkshire when interest rates rise, we should learn from this. That said, even though you are academically correct in stating that higher interest rates increase the attractiveness of alternative investments, it only increases on a relative basis, and not an absolute basis. If one were to do an empirical risk/reward comparison of MSFT's 5-10 year horizon as compared with a 5-10 year horizon of say a GM investment grade bond, (judging absolute return as reward and implied volatility/modified duration/convexity as risk) throughout periods of rising interest rates I think you will see my point. I must caution those who feel that rising interest rates justify the abandonment of all equities which consistently create value to simply follow the crowd into debt instruments or purported inflation hedges. This behavior is beneficial to short term professional traders who must show quarterly or monthtly revenue (notice I said revenue, and not profit), but not to the average individual investor (ex. picking stocks for an IRA or college fund). Professional traders can never match the investment performance of true investors (over longer horizons), because they must consistently show revenue, and cannot sit through short term fluctuations in search of profit. |
