When it comes to picking where he should invest, the stock market, according to Warren Buffett, is a no-brainer. On CNBC last week, Warren Buffett made an appearance and said that the current interest rates, i.e. the 10 year US Treasury bond at 2.42%, is not that enticing to him.
“I don’t start salivating, let’s put it in that way,” said Buffett.
He is definitely not excited about lower interest rates, but he doesn’t particularly mind them either: they keep the stock market strong and push prices much higher.
“Everything is a function of interest rates,” said Buffett. “Interest rates are like gravity.”
What Buffett may mean is that, since gravity is a constant, interest rates always have an effect on different sectors of the economy. As far as the stock market is concerned, low interest rates mean that people are investing in it more. This broader demand for high-quality stocks raises the value higher, and this helps grow investors’ portfolios.
When interest rates stay around near 0%, according to Buffett, assets are worth much more.
“Every asset, at present value, is worth the cash it will return before its termination date,” said Buffett.
But the inverse of that statement is also true. When interest rates go up, investors that are risk-averse will take their money out of the stock market and deposit it instead.
“If interest rates were 10%, all of our stocks would be worthless,” said Buffett.
As usual, the overall deciding factor for Warren Buffett had nothing to do with what the market is doing, but the confidence that he has in the businesses in which he invests in.
“If you told me the stock market was going to go down 500 points next week, I would’ve bought those businesses anyway,” said Buffett.