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By Investment Master Class

“At times when interest rates are unusually low, however, investors are likely to find very high multiples being applied to share prices. Investors who pay these high multiples are dependent on interest rates remaining low, but no one can be certain that they will.  This means when interest rates are unusually low, investors should be particularly reluctant to commit capital to long-term holdings unless outstanding opportunities become available, with a preference for either holding cash or investing in short-term holdings that quickly return cash for possible redeployment when available returns are more attractive” Seth Klarman

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“When interest rates are low we have conditions for asset bubbles to develop. When money is free the rational lender will keep on lending until there is no one else to lend to” George Soros


“Tight money conditions, which translates into high costs for liabilities, will create the best opportunities for acquisitions, and cheap money will cause assts to be bid to the sky” Warren Buffett

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“Simply put, investors will willingly pay higher multiples if they receive low-rate non-recourse financing than they will in an unleveraged transaction” Seth Klarman

“I have quoted before the Scandinavian economist, Knut Wicksell, who observed that when interest rates went to zero and stayed there, expect investment valuations to reach infinity.” Jonathan Ruffer

“.. 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. In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there--in that tripling of the gravitational pull of interest rates--lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere” Warren Buffett

“A speculative wave was beginning to gather force and money was freer than it had been at any time since the panic” Bernard Baruch

"In a zero interest rate world, everything is nonsense. But nonsense rates do not change the fundamental truth of investing - the value of any asset is still determined by its future cash flows." Christopher Parvese

“To be sure, money greases the skids of commerce, and easy money lubricates the engine of success. In simple terms, financial bubbles, driven as they are by human folly, are often the result of too much money chasing too few worthy ideas, leading to overinvestment and excess supply” Frank Martin

"In Field of Dreams, Kevin Costner was told, "If you build it, they will come".  In the financial world, if you offer cheap money, they will borrow, buy and build - often without discipline, and with very negative consequences"  Howard Marks

“We use the same discount rate across all securities. We may be more conservative in estimating cash in some situations. Just because interest rates are at 1.5% doesn’t mean we like an investment that yields 2-3%. We have minimum thresholds in our mind that are a whole lot higher than government rates. When we’re looking at a business, we’re looking at holding it forever, so we don’t assume rates will always be this low.” Warren Buffett

“A reasonable spread is only good enough if you have an acceptable starting yield” Steve Romick

“Years of picking up a few points of extra yield can be wiped out in a matter of days – or even hours – of capital losses”  Marathon Asset Management

"Reaching for yield over time has proved to be extremely hazardous to your financial health. As one wag put it, "More money has been lost reaching for yield than at the point of a gun."  Barton Biggs

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