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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Investor2 who wrote (9436)	12/28/1999 3:15:00 PM
From: cfimx	Read Replies (1) \| Respond to of 78523

deja vu all over again. remember when investors ignored rising rates in 1987? Rising rates are not just an "alternative" to stocks. This is from Buffet's recent Fortune article that everyone has managed to ignore. <G> To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate. Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there.