Offbeat Buffett says interest rates are key in determining stock values

21:21  17 may  2018
21:21  17 may  2018 Source:   cnbc.com

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Warren Buffett , chairman of Berkshire Hathaway, almost never talks publicly about the general level of stock prices--neither in his famed 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 .

However, Buffett looks at valuation and interest rates together to get a bigger picture of where stocks are headed. Here's what he says On the contrary, Buffett uses the interest rates from bond markets as a yardstick to determine how relatively cheap the stock market is .

As bond yields rally to multiyear highs, investors may want remember Warren Buffett remarks on the importance of interest rates for valuing investments.

In a 2017 interview video clip found using CNBC's Warren Buffett Archive, the investor explained why rates matter so much for stock investors.

"The most important item over time in valuation is obviously interest rates," Buffett said last year. "If interest rates are destined to be at low levels … It makes any stream of earnings from investments worth more money. The bogey is always what government bonds yield."

The yield on the benchmark 10-year Treasury note climbed to 3.12 percent Thursday, its highest mark since 2011.

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The world's most successful long-term investor, Warren Buffett , says the answer to whether the American stock market is in a risky valuation bubble depends on the future movement in interest rates .

Glaser: So, one of the most interesting discussions that Buffett had was about stock valuation and how it relates to interest rates . He said that stocks do seem to be pretty fully valued or to have high valuations, but that that might be justified with rates .

The Oracle of Omaha explained when interest rates rise to high levels such as in the early 1980s, it makes higher equity valuation multiples much less attractive to investors.

"Any investment is worth all the cash you're going to get out between now and judgment day discounted back. The discounting back is affected by whether you choose interests rates like those of Japan or interest rates like those we had in 1982," he said in 2017. "When we had 15 percent short term rates in 1982, it was silly to pay 20 times earnings for stocks."

Many investors use U.S. government bond yields as their "risk-free" discount rate in financial models to value stock investments.

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