Who cares if the Fed raises rates? Why does that matter?

Who cares if the Fed raises rates? Why does that matter?

This fixation on rates doesn’t make sense.

If you have an incredible business, something you really think can earn substantial amounts in the future, do you really care if the discount rate is 1.7%, 2.25% or 3%? Does it really make sense to invest in fixed income or non-interest-bearing assets when you can buy equities producing 20%+ ROA, 30%+ ROIC and 50%+ ROE?

Discount any cash flow stream by e-rt and you will see precisely what I mean.

$100e(-.017)(1) = $98.31

$100e(-.0225)(2) = $95.60

$100e(-.03)(3) = $91.39

𝝨 = 285.3

What if rates went even higher? What if they went from 1.7% to 5%?

$100e(-.017)(1) = $98.31

$100e(-.03)(2) = $94.18

$100e(-.05)(3) = $86.07

𝝨 = $278.56

Scenario 2, which I doubt anyone expects to happen, represents a decline of only $6.74 or a 2.36% discount overall from Scenario 1. This is exactly the point.

The earnings power of AAPl, MSFT, FB, AMZN,and other best-in-class equities is vastly superior to 95% of other investment opportunities. These miniscule changes in yields are irrelevant.

Yes, a higher risk-free rate will eventually diminish the value of equities – but right now, in January 2022, opportunity abounds. In fact, I think the SP 500 could surge 27% to 6000 by end of this year.

Good luck!$Apple(AAPL)$ $Meta Platforms, Inc.(FB)$ $Amazon.com(AMZN)$ $Microsoft(MSFT)$