Low Interest Rates = Low Returns = Higher Risk


The hedge fund manager Howard Marks wrote a memo this week about the macro conditions for the US.

His memos are more insightful than your average journalist (or me). That's because he has skin in the game and speaks from experience. If you're an investor, I recommend giving them a read.

His main points were what I've discussed in previous newsletters:

  • Low-interest rates
  • Fed stimulus
  • InflationWhile mine were surface level, he provides more context. The memo's main thesis was:
"In my view, the low interest rates represent the dominant characteristic of the current financial environment, creating the dominant consideration for investors: the lowest prospective returns in history."

It goes on to explain that with lower returns, comes increased risk in pursuit of higher returns.

So what's that mean for investors?
The easy answer would be to make investments that aren't driven by macro forecasts. But finding companies like those are difficult.

Charlie Munger once gave a strategy for small investors seeking opportunities:

"It’s tougher for you, but that doesn’t mean you won’t do well-it just may take more time. But what the heck. You may live longer. I’d work with very small stocks, searching for unusual mispriced opportunities, but it’s such a small world."


My portfolio has unintentionally taken the low-risk route. So I've started looking for riskier, not necessarily mispriced stocks. But mainly micro-cap companies with a greater competitive advantage.

This approach is well-known as the barbell investment strategy. Balancing your low-risk investments with extreme risk assets.

It's not anything new. More people are seeking riskier bets to compensate for low interest rates (and lower returns).

People who start investing typically want to go for the Apples and Teslas. It's not wrong, but it's their reasoning (or lack thereof) which sucks. There's no strategy behind those stock picks. To give more context on what to focus on, I found good resources to help those starting:

10 Rules of Thumb for a Volatile Market
Lessons from – “The five rules for successful stock investing” by Pat Dorsey
The Most Important Thing Memo By Howard Marks

A good strategy would be to set yourself up for low risk first (index funds, ETFs, value stocks, etc). Then move onto greater risks which you're able to afford.