The chance of explosive future growth has guided some of the most successful investors of the past few decades. But higher interest rates could be about to turn their logic on its head
Save time by listening to our audio articles as you multitaskBy now, the associated investment lesson is eye-rollingly familiar. Jam tomorrow should be prized over jam today. Valuing a firm by its present earnings, assets and dividend yield is for the dinosaurs. The pace of technological innovation has made these metrics obsolete; instead, what matters is a company’s chance of explosive future growth.
To see why, first consider a crucial driver of this year’s downturn. In place of current profits, growth stocks offer the prospect of bigger ones in the future. But a dollar in ten years’ time is not worth the same as a dollar today, because the dollar today can earn income in the meantime. At an interest rate of 1%, you need to deposit $91 to have $100 in ten years’ time. At a rate of 5%, you can deposit just $61.
In other words, higher interest rates dramatically alter firms’ incentives when choosing which timeline to invest over. Sacrificing short-term profits for longer-term gains is one thing when you are trying to persuade investors that your superapp, machine-learning algorithm or gene-sequencing widget has the potential to up-end an industry. It is another when even the best-case scenario has its value so heavily skewed towards what can be done in the next decade.
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