Most investing textbooks will tell you commercial property – or real estate, as US authors prefer – is a useful diversifier to a portfolio.
 
A halfway house, so to speak, between equities and bonds.

Property benefits from economic growth, as equities do. And because you’re buying real assets – bricks-and-mortar – you also get some inflation protection.
 
That’s in contrast to cash or bonds, where inflation can only erode wealth in real terms over time.
 
What’s more, rents are often pretty sticky – more so than the earnings of many companies. Indeed, for years UK landlords had their tenants agree to upwards-only rent reviews.
 
And with those rents, property owners get bond-like income.
 
Property can therefore seem like a kind of Goldilocks investment. Some growth and some income, not too much downside. The best of both the equity and bond worlds.

View from the top

It’s an appealing pitch. But like the over-ebullient sales patter of an estate agent, reality has often fallen far short of the hype – at least for most of the time I’ve invested in the UK market.

That period began with a commercial property rally in the early 2000s.

Property hadn’t done very well in the 1990s Dotcom euphoria. Few ‘old economy’ stocks did.

But the Dotcom bubble burst. And once investors shook off their gloom, they found commercial property was attractively priced in what became an era of cheap money.

Prices began to rise, peaking in 2007 when British regulators followed their US counterparts and enabled the big UK property bellwethers to convert into REITs – real estate investment trusts – which granted certain tax advantages.

By that point UK-listed property companies such as British Land and Landsec (then Land Securities) had seen their share prices more than double in just a few short years. 

Another decade, another disaster

Of course, such exuberance wasn’t really in the ‘slow and steady’ commercial property sales brochures.

Perhaps that should have been a warning sign?

Because sure enough, the newly minted REITs subsequently cratered after the mis-selling of sub-prime mortgages in the US, triggering a global financial meltdown between 2007 to 2009.

Cheap debt now looked more like a liability as asset prices crumbled. British Land lost more than three-quarters of its market cap in the rout.

Then after that bear market bottomed in 2009, there followed another (more modest) advance.

With low interest rates – this time allied to quantitative easing – Central Banks once more stimulated economies back into life. Anyone in London in the 2010s saw mothballed sites sprout a profusion of new skyscrapers with colourful names – whether official labels such as the Shard, or nicknames like the Cheesegrater and the Walkie-Talkie.

The public engagement with the changing London skyline was telling. Commercial property was on a roll again. For a brief moment it even got a sexy tech poster-child in the shape of WeWork, the multi-billion dollar flexible office startup.

But yet again the good times didn’t last. US investors baulked at WeWork’s valuation when it tried to float in 2019. But far more important for the whole sector was a setback of Biblical proportions the next year.

I mean, of course, the Covid pandemic, which began in early 2020.

The virus emptied offices and malls. City centres became ghost towns. Workers stayed at home. Tenants stopped paying rents. Recovery spluttered as more lockdowns came and went. Even after vaccinations brought some relief, flexible working continued. Many offices remain half-empty.

During the pandemic there was a huge scramble for logistics and distribution hubs due to the boom in online retail – but even this has ended in a bust.

In early 2022 the almighty Amazon said it expanded too far, too fast during Covid. The admission chilled the ‘sheds’ sector, which provides warehousing to online retailers.

Shares in Covid darling Tritax Big Box have slumped 44% in 2022.

Priced for sale

A property fan might counter that I’ve not mentioned dividends much in my discussion above. Fair comment, considering that income is an important part of returns from commercial property.

Indeed, two years on and the commercial property sector is still only inching back towards health.

With hybrid working embedded as the new normal, London for example has 31 million square feet of empty office space available. That’s more than 50% of what was available at the end of 2019.

And while the latest and greatest new developments can command high prices – perhaps in part because occupiers hope a shiny workplace might encourage their staff to show up more frequently – older buildings are out in the cold.

It’s a similar story with retail spaces and hospitality venues. A lot of damage was done during the pandemic. The recovery has been patchy, to put it charitably.

This gloom is evident in the discount Mr. Market has placed on the shares of British Land and Landsec. Both REITs currently trade for less than half the stated value of their assets.

It could be an opportunity. But it could also be investors divining more asset markdowns ahead.

Recession looms and interest rates climb. Higher rates make the debt property firms employ more costly to service – as well as boosting bond yields and hence their attractiveness as an alternative.

Riding the waves

So, I’ve given up on the textbook notion that property shares are an especially well-appointed investment, somehow shorn of the drama of equities but with returns better than boring bonds.

Because in practice the asset class seems to deliver the worst of both worlds, too. The ups and downs of cyclical shares – but with the limited potential of fixed income.

It’s like you go house-hunting for a suburban idyll between the city and the country but you end up buying in a boom-and-bust frontier town.

Perhaps it’s different if you’re rich enough to own your own petrol stations, local stores, and offices.

True, you’d have to deal with tenants and paintwork. But at least you’re free of the market’s whims.

I’ll continue to look for opportunistic buys in the sector – and now may well be such a time. But only for the short term. Property has let me down too often to be a forever home for my money.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, British Land Co, Landsec, and Tritax Big Box REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

You’ll probably be as surprised as I was by what I’m about to share.

But I’ve learned from social media that all the political drama in the UK involves a big conspiracy.

Yes, you heard right!

Former chancellor Kwasi Kwarteng’s Mini Budget, new chancellor Jeremy Hunt’s Reverse Mini Budget, more U-turns than at the dodgems…

…it looks like bungling, but it’s really part of a global plot to take control of the British economy.

I know – it’s hard to believe.

Like you I thought sinister conspiracies unfolded in the shadows. Not on the nightly news!

Presumably I’ll get my invite soon to a dingy basement or a motorway services carpark, where I’ll be briefed at last on how it all makes sense.

Cui bono?

You know, it would almost be a relief to believe in conspiracies these days.

Then there would be some method to the madness. A rationale behind mortgage rates rocketing and millions worrying about their pensions.

But in reality, Kwasi Kwarteng promising unfunded tax cuts against a backdrop of inflation, rising rates, skittish bond markets, and over-leveraged pension funds more than explains the mayhem.

I’ll leave it to political pundits to debate what it means for power at Westminster.

What savers and investors want to know is what does it mean for our personal finances – and for the fortunes of British companies we invest in?

Because the one thing the conspiracy theorists are right about is there will be winners and losers from this upheaval.

Feel the squeeze

Certainly most Fools will have less money to save and invest than they might have expected after last month’s Mini Budget.

That’s because Kwarteng’s income tax cut to 19% has now been cancelled – indefinitely. The additional 45% tax rate stays too. Taxes on dividend income remain unchanged.

Indeed of the touted personal tax massacre, all that’s left is the scrapping of the social care levy and of the associated 1.25% National Insurance hike.

To be fair, new chancellor Jeremy Hunt has mostly just rewound time. Apart from the 1% income tax trim – originally set for 2024 – big tax cuts weren’t expected before the Mini Budget anyway.

But Britons already face the biggest tax take for 70 years, and it won’t be easing any time soon.

As individuals, all we can do is try to protect our money for ourselves.

Cash is more valuable than ever as the cost-of-living crisis mounts, so be sure to use your tax-free shelters – ISAs and pensions – to mitigate paying more tax than you have to.

Of course with mortgage rates soaring in the wake of the Mini Budget, it will be harder for many middle-class households to find extra money to save in the first place.

There’s some hope rates will soften as things calm down. But for now a growing mortgage burden will add to more expensive utility bills from April 2023, thanks to the curtailing of energy bill support.

It’s hard to disagree we need to get the State’s finances on a securer footing, but costlier energy bills and mortgages in the meantime are hardly conducive to saving and investing.

Pensions under pressure

For others, it was the headlines about troubled pension funds, forced selling and ‘doom loops’, and even the Bank of England using the phrase ‘fire sale’ in a press release that was most unsettling.

Nobody wants to think their retirement funds could be in peril, however remote the risks.

Fortunately, the Bank of England’s temporary intervention in the gilt market eased these pressures.

Pension funds have raised the additional collateral they require. And in the longer term, their funding position actually looks healthier, as higher rates make it easier to meet future liabilities.

Still, as the dust settles I expect we’ll hear of a few close-shaves and near-misses from the chaos.

BT’s huge pension scheme has disclosed its assets fell by more than £11bn in recent weeks, though thankfully it says there was no overall worsening in its funding position.

And L&G – a big player in the pensions market  – had to reassure investors in the midst of the crisis that its business had not been overly disrupted and its balance sheet was strong.

For older hands, it was an unwelcome reminder of the financial crisis of a decade ago.

Rating their choices

At least since Jeremy Hunt took charge, long-term gilt yields have fallen back.

That’s important because of their link to the rate the government pays on the borrowing needed to meet its spending commitments.

For commercial companies that haven’t thought about rising rates for a decade, higher rates present both opportunities and challenges.

Obvious beneficiaries are High Street banks.

Higher rates increase their net interest margin – basically the difference between what interest they pay on deposits versus what they rake in on mortgages and loans. These margins were squeezed by the near-zero interest rate era.

However it’s not all good news even here.

If high interest rates make it difficult for people to pay their mortgages, we could see mortgage defaults and even a house price crash.

Other kinds of loans could sour, too – and stock market-listed firms with large borrowings up for renewal could also struggle.

So I expect banks to increase the provisions they set against bad debts in the months ahead.

Another popular sector of the stock market hurt by higher rates are house builders. Share prices here have been falling all year as rates rose, and the past month has made things worse.

More expensive mortgages reduce the spending power of buyers for new homes. That curbs the prices they can stretch to – if not taking them out of the market altogether.

Taxes taxes everywhere

If we do see a marked slowdown in the UK property market then we can expect a deep recession. Housing is arguably the engine of Britain’s economy.

And that would clearly be bad for nearly all UK companies that operate in the domestic market.

Less a matter of if than when, though, is the rise in corporation tax that goes ahead from April 2023.

This rise will help plug the multi-billion hole in the chancellor’s budget, but it will also reduce the spare cash firms have to reinvest in their business, or return to shareholders as a dividend.

UK banks again will suffer. They already pay an additional 8% surcharge on profits that was set to fall to 3% but will now stay unchanged. Add that to the upcoming 25% rate of corporation tax, and banks face a 33% tax rate.

Then there’s the threat of more windfall taxes to help balance the nation’s books.

In opposition Labour has been calling for an extended windfall tax on UK energy producers. A pragmatic Jeremy Hunt may decide he has no choice but to raise more revenue here.

Energy suppliers – including the renewable investment trusts popular with private investors as income plays – have already been told they face a price cap that will see most of their ‘excess’ revenues go to government.

Again, share prices slid in anticipation and the trusts now trade on a discount.

Fingers crossed

In summary, it’s hard to be optimistic about the economy, household budgets, or for British-focused companies for the foreseeable future.

We were warned months ago by the Bank of England that Britain faced a long recession. Things have only deteriorated since then.

There are some bright notes. Higher rates are welcome if you have spare cash. And wholesale gas prices have come down recently. Perhaps next year’s energy bills won’t be quite as high as feared.

Also, one thing I’ve noticed over the years of being the bearer of bad news is such articles often age badly. True, it can be because things get worse! But the economy is inherently unpredictable and can surprise positively too. (An end to war in Ukraine would be a game-changer.) For now there’s little a Fool can do, though, but to batten down the hatches.

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The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Do you remember how on 20 March 2020 – as fear about a deadly new virus crystallised into the the reality of lockdowns and sent stock markets to new lows – you transferred all your spare cash to your online broker and filled your boots with cheap shares?

What’s that? You didn’t manage it?

Okay, a once-in-a-century global pandemic is pretty terrifying I concede.

How about 13 March 2009?

As the financial crisis raged over the prior 18 months, you’d hoarded cash. You even split your savings across multiple institutions. The run on the banks in 2007 was still fresh in your mind.

But now you saw the opportunity! You waded into the stock market to buy shares at historic lows.

You waded, right?

No? Not so much?

Hmm, well I suppose being confronted by the potential collapse of the financial system had put the willies up everyone. You’re excused a little caution.

Surely, though, the old hands among us were by then sitting on fat gains we’d made from diving into the stock market at the depths of October 2002?

Nearly three years on from the bursting of the Dotcom bubble and with the drums of war beating in the wake of the September 11 attacks, we saw through the gloom.

Now was time to buy those reviled tech stocks and get rich.

We all bought Nasdaq index trackers and multiplied our money ten-fold over the next two decades.

I’m sorry, what was that?

You say you didn’t you get the memo?

Hello? Is anybody still there?

We’re all not all-in together

Don’t beat yourself up if you failed to spot these historic buying opportunities at the time.

You’re in good company.

Great company I would say – because I didn’t quadruple down on equities either.

True, I bought some shares around the Covid lows of March 2020 – but only because it’s my habit to average into market declines throughout to try to pick up long-term bargains.

I’d have been buying shares in the weeks before too. Only to see them fall further.

But I never bank on capturing the bottom. A good thing too because I never do, except by luck.

It was the same story for me in March 2009, and for the vast majority of other sensible investors.

Yes we may have bought shares on the day the bear market was finally vanquished.

But for 99.9% of people, that will have been either as a consequence of their everyday share trading – or perhaps because an automatic monthly investment plan had gone through.

A tiny handful of active speculators may have timed the very bottom to perfection.

But I would bet my hard-won savings that they haven’t done it twice.

Below the belt

The reality is what seems a mere downtick on a long-term graph of share prices from a safe distance of two years – or 20 years – can feel miserable at the time.

They say nobody rings a bell at the bottom of a market.

And in my experience if they do it’s more likely to be a fire alarm or some other warning signal.

This matters not just because you shouldn’t set unrealistic standards for yourself as an investor.

It’s also because you should take the hindsight accounts of market historians with a pinch of salt.

Pundits – myself included – can’t resist talking about how this index or that share returned so many hundred percentage points from a low it that it put in way back whenever.

But in truth very few investors bought that low. The exact reason that shares plumb such depths is precisely because there are few buyers at the bottom.

Yet we all fall for these narratives. And so they end up becoming received truths.

The good old bad days

As someone who makes a living writing about the stock market, I’ve seen this many times.

The bull market of the 2010s offers a fairytale of an example.

As the world emerged from the Great Financial Crisis of 2007 to 2009, very few commentators had any confidence that equities would deliver solid returns for the foreseeable future.

Fund managers were gloomy. Many ordinary folk were looking to cash and gold – if not shotguns and baked beans – as the best place to park their cash.

Markets rose but these were labelled sucker’s rallies. Regulators even revised down the expected returns that pension funds should employ in their projections.

Times looked tough.

The Millennial generation of young adults duly shook their fists at those who’d come before and been lucky enough to enjoy equities soaring throughout the 1980s and 1990s.

That would never happen again. Millennial investors would be mired in poverty thanks to markets that went nowhere.

However, we all know it didn’t pan out that way.

Global markets climbed almost relentlessly between 2010 and 2020.

So much so that by the end of the decade it was an even-newer rank of young adults – Generation Z – who raged against the good luck of previous generations.

Boomers, Generation X, and even the Millennials had it easy.

But now Generation Z was screwed.

Sale on. Everything must go!

Certainly it’s been a rocky start for young investors. Global markets crashed in 2020, then soared to frothy heights, and then burst again as central banks finally began to raise interest rates.

UK investors are dealing with an especially feverish outlook.

A new government has rattled the markets. The Bank of England has been buying gilts to ward off what even it officially dubs a potential ‘fire sale’ caused by over-leveraged pension funds.

Oh, and there’s the threat of nuclear war.

It feels like a terrible time to invest. Shares rise, only to fall further. Pretty much every asset has been dinged in 2022. I open my broker account with a sense of dread.

Does this sense of universal pessimism mean shares are bound to rally from here?

Will a future me be pointing to this as the inevitable day the market turned?

I wish it were that simple.

First, last, and always

The lesson of history is not that every decade you get a ‘no-brainer’ chance to dust down your Warren Buffett quotes, pile into shares, and then see your net worth rocket while you pop Pringles and whistle “we’re in the money” to yourself.

Rather, history shows that every decade or so the wheels seem to be coming off.

Why are you throwing good money after bad? You’re getting poorer every day. The outlook seems terrible.

But at some point – you never know when – all that uncertainty is finally baked into prices.

The news continues to be bad.

But strangely, your short-term returns start to look good.

You fear it won’t last. You don’t want to jinx it! You wonder if the doomsayers who protest it’s all a mirage will be proved right yet again.

It’s only a few years later that you can look back and see that it really was the opportunity. The fill-your-boots chance that nobody could know with certainty at the time.

See you on the other side

Don’t base your investing strategy around timing stock market lows.

Build your plans around being a sensible investor for a long time. Through thick and thin.

Yes, you’ll suffer when the market plummets. But you’ll be invested every time it turns higher, too.

You won’t bail, and when it’s all averaged out you should find you’ve captured the long-term return that equities have historically delivered.

No, that’s not no-brainer share trading.

But it is intelligent investing.

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I spent my first regular paycheque in the mid-1990s on a new music system. A cheap-but-not-inexpensive compact unit that – for no reason – had many red lights hidden within its recesses.

In the showroom it looked bold and stylish.

In my bedroom, seen through the window from the pavement below on winter evenings, it made our shared house look like something from Amsterdam’s sex worker district.

Only one person ever actually rang the doorbell to make enquiries.

But from the moment I plugged that stereo in, I had a serious case of buyer’s remorse.

You know – that hollow feeling after you splash the cash on something that seemed so exciting, only to immediately wish you hadn’t.

Red letter day

I suspect even the world’s richest man knows such remorse…and to the tune of the $44 billion he’s agreed (again) to pay to acquire Twitter.

Elon Musk’s offer for the ubiquitous social media platform was accepted back in April.

But then – coincidentally I’m sure – as the stock market crash unfolded, Musk changed his mind. 

Would a mob-fuelled hate-mongering social network really look so good next to his electric cars and spaceships?

Would he ever get his billions back?

We’ve all been there.

Musk protested he was sold a pup. Or millions of pups – fake Twitter accounts run by bots.

Up to 33% of Twitter’s users were false or spam accounts, his legal team alleged in August.

And nobody wants to waste billions on that.

However for reasons that still aren’t clear – but presumably are legally watertight – Musk now says he will buy Twitter. And for the original offer price too.

Given the cost of the drama to his status and bank balance, Musk may even have a rare case of what I call buyer’s remorse remorse – where your original remorse is so bad you ultimately throw even more good money after the bad to rid yourself of the feeling.

To avoid that costly fate I soldiered on with my sordid stereo for five long years, through ridicule, laughter, and damage to my reputation.

Musk could only take six months of the same.

Twitter 2.0

I do consider Elon Musk one of the leading entrepreneurs of our age, for the record.

But I also wonder if in buying Twitter he’s paying an astronomical price for his hobby of saying – or tweeting – whatever comes into his prodigious mind at any given moment.

Because what can Musk do with the platform, really, that even Twitter’s creator, Jack Dorsey, couldn’t manage in two stints at the helm?

Whatever Twitter’s ultimate potential, it’s notable that both Musk and Jack Dorsey believe it can’t be achieved as a publicly-listed company.

Musk said so in his letter announcing the takeover offer.

And Dorsey has said so privately… in text messages to Musk! The exchanges between the two billionaire pals we revealed during the recent legal tussle.

Dorsey apparently thinks Twitter should never have become a company, but rather some sort of platform or foundation. Presumably this entity would make and manage rules about how third-parties would access Twitter – and also leave them to build the apps and reap any profits.

Which is probably not $44 billion worth of music to the ears of Elon Musk, nor his accountant.

Perhaps the kindest thing Musk could do for humanity would be to switch Twitter off. Many would applaud such a move, at least until it was replaced by something even more febrile.

Alas Musk told Twitter’s board in his offer letter that be believed Twitter should be the global platform for free speech. So closing it down seems unlikely, even without $44 billion to recoup.

Twitter will have to be reinvented rather than euthanised.

Never trust a shareholder

Judging by recent hints, Musk is reviving his old dream to create an ‘everything app’ that integrates messaging, shopping, and payments, like those used in China and with Twitter at the core.

And apparently such drastic reinvention couldn’t be done while Twitter remained a listed stock.

But is that really true?

I understand the theory. Public market shareholders are supposedly greedy for steady and predictable cashflows and nervous about huge bets that may not pay off.

A year ago a hedge fund manager even labelled London’s Stock Exchange as a ‘Jurassic Park’ full of dinosaur companies that were hamstrung by income-seekers demanding dividends.

I was unpersuaded by that line, too.

UK investors are probably excessively attached to dividends.

But many of the major dividend-payers in London deal in commodity markets, where the clue is in the name. There’s only so much bold innovation you can get out of a lump of iron ore.

Others are Steady Eddie consumer giants that do a fine job generating cash, but where you’d be worried if they were deploying most of their profits to – I don’t know – regularly reinvent toothpaste.

As for the US stock market, its investors are famously tolerant of money-burning companies on a mission, just so long as they believe management has a plan.

Think about the long leash Amazon was given for decades to grow, with little in the way of profits.

Or how software incumbents like Adobe have transitioned from the lucrative business of selling discs in boxes to instead earning small recurring subscriptions for services based in the cloud.

I believe Twitter’s shareholders would also have been all ears if offered a compelling new vision.

I mean, even today Twitter shares trade below a price they hit shortly after it listed back in 2013.

There wasn’t much of an apple cart to upset here.

Not too big to fail

The truth is Twitter’s public shareholders couldn’t support a radical transformation not because they wouldn’t stomach it, but because they were never presented with one.

The year Twitter listed, rival Facebook’s CEO Mark Zuckerberg famously said: “Twitter is such as mess – it’s as if they drove a clown car into a gold mine and fell in.”

And not much has changed since then.

That’s why I don’t like to see leaders of Musk and Dorsey calibre blaming public market investors for hamstringing Twitter’s future.

The 2010s saw big tech winners like Twitter remain private for years as they grew into multi-billion valuations. We ordinary investors weren’t given a look in.

Only when they processed onto the public market like Imperial Star Destroyers trying to taxi at Gatwick could we finally buy into their now gigantic valuations.

It was a frustrating time – made even worse because when we finally did get a chance to back multiple innovative and disruptive companies, it was at the tail end of a long bull run.

By that time almost anything could be foisted onto the US Nasdaq exchange if promoters used the right buzzwords, culminating in the dubious SPAC boom – and the current stock market crash.

Most investors would have gladly swapped the whole miserable experience to instead invest in the likes of Uber, Spotify, and even Twitter when they were far smaller – and riskier– than today.

But they never had that opportunity.

So long and thanks for all the Tweets

We’ll now see if Musk will suffer winner’s curse in taking Twitter off the public markets.

Winner’s curse is the nastier big brother of buyer’s remorse. It’s when you win a bid – for an antique at auction, say, or maybe a social media giant you spent months trying not to – only to pay too much for it.

Musk certainly faces huge challenges if he’s to simultaneously champion Twitter as a free speech platform while remaking it as a Western version of Tencent’s WeChat – and make a profit on his $44 billion investment.

But at least he has the chance.

Twitter’s long-suffering public market shareholders can only take Musk’s money and continue to watch from the sidelines. So let’s not blame them for Twitter’s – or any other company’s – problems.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon and Twitter. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Vladimir Lenin, the revolutionary founder of the USSR, once said:

“There are decades where nothing happens; and there are weeks where decades happen.”

To which pension fund managers might nod in agreement after the week they’ve had.

Because after being bludgeoned into dormancy for a decade, the UK government bond (gilt) market has sprung to attention like Frankenstein’s Monster shocked into life.

And just as with that confused and lumbering creature, it quickly began to break things.

Indeed pension funds became so battered by the rate gilt prices were falling that their plight prompted a massive intervention by the Bank of England.

Lenin faced armed resistance to the Marxist makeover of his October Revolution.

But it seems chancellor Kwasi Kwarteng has to deal with bond vigilantes.

Armed and dangerous

The vigilantes label fell into disuse in the low interest rate era we’ve just lived through.

But the idea speaks to deep-pocketed traders who ‘police’ the markets – by dumping bonds in response to what they deem fiscally unsound government policies.

Such traders are naturally just out to make a profit – or avoid a loss – like any of us in the markets.

Yet because the appeal of gilts is so closely tied to the economic outcomes of government policy – and because the government also drives gilt supply through its borrowing – it’s easy to paint bond traders as bloodthirsty accountants seeking vengeance if the sums don’t add up.

Of course, any vigilantes need ammunition to fight their battles.

When interest rates were next to nothing and central banks were soaking up bonds with quantitative easing, the traders didn’t have much firepower.

But high and persistent inflation has done for all that.

The Bank of England – and its global peers – have instead been raising interest rates.

Our Bank even announced it would start selling gilts, too, to start unwinding quantitative easing.

Hence gilt prices are moving again… and the moves really matter.

Battle zone

The volatility so far in 2021 was notable, but it pales compared to that following the Mini Budget.

Bond prices immediately plummeted. Yields soared.

To give just one example, the iShares UK Core Gilt ETF fell 10% in four days.

That’s a crash in an asset class most hold for its stability.

Lenders withdrew hundreds of mortgages, fearing they couldn’t be priced with yields shifting so quickly.

The already-weak pound fell further after the International Monetary Fund warned our new government’s plans risked higher inflation.

Then the drama really escalated as pension funds were roiled.

Gilts fell so quickly that fund managers were struggling to maintain hedging strategies designed ultimately to ensure they could meet the income promises made to pensioners.

Which seems to have been the last straw for the Bank of England.

Far from selling its gilts, the Bank pledged to spend another £65bn buying more gilts to keep the market orderly. And presumably to give pension funds enough time to avoid blowing up.

Escalating tensions

Perhaps by the time you read this things will have settled down.

Or maybe not.

Either way, it’d be a mistake to dismiss these ructions as some esoteric contest played out by testosterone-fuelled City traders.

Because politics aside, what we’re seeing is a financial system grown complacent on low rates suddenly getting whacked with resurgent borrowing costs.

It’s been made especially chaotic because it happened so fast.

But the direction of travel for yields – up – has been clear all year.

And higher yields matter for our personal finances and for the companies we invest in. It indicates borrowing is becoming more expensive across the board.

The Bank of England says its new support is temporary – and I’d bet prices will start to fall again when it raises interest rates, though hopefully in a more measured fashion.

Either way, markets will get to grips with volatility being back eventually. Pension funds – and others – will adjust. Institutions will be better prepared for more wild moves.

And the Bank of England will continue to raise interest rates.

Yet there will still be more consequences as higher rates roll out across the real economy.

First strike

As stock market investors, we got an early dose of the regime change.

Rising interest rate expectations fed into analysts’ valuation models and reduced the attractiveness of company cashflows – especially far distant earnings.

As a result the most highly-rated growth stocks saw their share prices down even back in 2021.

Investors turned to so-called value stocks. These seemed a better bet with rising inflation and rates.

And indeed lowly-rated value shares have done better than their growth cousins recently. A big weighting to ‘old economy’ value shares is one reason the UK market has held up better than most markets in 2022. (The other is the weak pound, which boosts earnings).

As interest rates have continued to climb, however, investors have started asking whether central banks will push economies into recession.

Recessions aren’t good for value stocks. So now their shares are sliding as such fears grow, too.

And here finally we get to the impact of higher rates in the real economy.

On the home front

Inflation aside, this drama that’s taxed economists, policymakers, and investors in 2022 hasn’t impacted most people’s everyday life very much.

But as higher market yields lead to pricier loans on the High Street, that’s changing.

Spiking yields mean more costly mortgages, even for longer-term fixes. Will straightened consumers cope? Or will the housing market creak or even crash?

Then there are the borrowing costs for companies.

For years we’ve heard about ‘zombie’ firms kept alive with cheap credit. With rates going up so quickly, we might witness a real-life zombie apocalypse!

There will be winners, too, such as savers with cash in the bank, although their higher interest income won’t be very exciting in real terms until inflation subsides.

Still, higher returns on safe cash deposits presents yet another headwind for shares.

Instead of bond vigilantes, in the low-rate era we had TINA – There Is No Alternative.

The acronym steered investors wanting a positive return away from low-yield cash and bonds and into equities.

Today though, there is competition. A 10-year gilt now yields 4% for example. That’s worthwhile.

Not enough to beat double-digit inflation, it’s true. But the Bank of England still expects inflation back towards its 2% target relatively soon.

Besides, most of us would gladly take 4% compared to negative returns in our portfolios this year!

Winning the peace

It all sounds grim. But most of us knew – even hoped – cheap money wouldn’t last forever.

Besides there’s not much we can do about it.

We can ensure our portfolios are diversified and invested the best way we know how. We can keep a lid on debt, and even step up our savings rate to help make up for recent losses.

Beyond that, it’s a matter of waiting it out.

Don’t be too alarmed, especially if you’re a new investor. Frightening episodes come along more often than you’d think. Yet those who invested wisely have made life-changing gains regardless, given enough time.

That pundits dusted down the ‘Black Wednesday’ moniker from the 1990s to repurpose for the post-Budget tumult reminds us we’ve similar before – and yet investors triumphed eventually.

I mean, that’s why we still have a 300-year old London stock exchange.

And Lenin has now only statues.

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Prompted by the regrettable Amazon spin-off series, I’m re-reading J.R.R. Tolkien’s The Lord of the Rings.

And – as 1,000-page trilogies are wont to – it’s filling my waking thoughts.

Maybe that’s why I see signs and portents in news that US creative software behemoth Adobe has agreed to buy rival Figma for $20 billion.

It doesn’t help that I’ve just got to an especially existential point in Tolkien’s tale.

Gandalf the wizard has broken a spell that has weighed down King Théoden of Rohan – one that caused him to foresee only ruin through a shadow of despair.

And almost a year since the Nasdaq index peaked then began a steep descent, tech stock investors feel you, King Théoden.

But chin up! Because as anyone who’s read Tolkien’s epic knows (and, as it’s the best-selling novel of all-time, that’s most of you), soon sunlight will stream down upon the monarch, rekindling his optimism of old.

His animal spirits, you might say.

Doom and gloom

Could Adobe’s big-ticket takeover similarly break the disenchantment of tech investors?

It’s not entirely fanciful. But for now the sector remains in a funk, even by the standards of a miserable year for nearly all assets.

True, UK-focused investors have been spared the worst. The London Stock Exchange has few of the sort of high-growth stocks that have come off the rails recently. The FTSE All-Share is down just 8% year-to-date.

That compares to a 20% slide for the US S&P 500 and 28% for the tech-heavy Nasdaq.

But most of us invest globally nowadays – with securing more exposure to the US tech stocks that have driven the past decade’s bull market being a major motivation.

Yet even here we’ve been lucky. Sort of.

Sterling has slumped 16% versus the dollar in 2022 (at the time of writing). This has had the effect of boosting the value of our overseas holdings, at least in terms of our dwindling currency.

That said, overseas losses puffed up by a plunging currency is hardly a reason to party. Our spending power has been greatly diminished versus our North American peers – though we’re doing better than the Jones’ next door if they kept all their wealth in pounds.

Also tech stocks have fallen so hard that UK investors in US-focused funds – especially those favouring innovative firms – have still been hammered, even with sterling’s decline.

The giant Scottish Mortgage Investment Trust was cut in half from its 2021 high by June this year, for example.

Even mainstream technology trusts and ETFs are down 30-40%.

A grand illusion

Sometimes it’s hard to see what could have caused a market reversal. But this time we have an abundance of culprits.

There was euphoria in the run-up, for starters.

The companies punished hardest in 2022 have been those that soared highest in the Covid era of lockdowns and home working.

As everything digital – from e-commerce to streaming to payments – boomed in 2020, pundits speculated lockdowns had pulled forward the future by a decade. Microsoft’s CEO said its customers had done two years’ worth of digital transformation in just two months.

Tech investors went wild. The price of Scottish Mortgage tripled in less than two years off its March 2020 lows.

Yet when economies reopened, it turned out sales and profits had often been pulled forward, too. Valuation multiples for digitally disruptive stocks were reconsidered in the light of earnings normalising, and consumers still being up for a long haul flight.

Then came inflation, thanks to resurgent demand and insufficient supply. Making it worse was a less sexy kind of disruption – the kind that sees shipping containers pile up at ports.

Inflation in turn caused Central Banks globally to raise interest rates.

And rates strongly influence how much investors will pay for profits in the faraway future.

It’s a kinda magic

Post-Covid reality looking rather like pre-Covid reality, inflation rampant, and interest rates competitive again.

No wonder growth stocks cratered.

Which brings us back to where we started on today’s quest – with Adobe’s acquisition of creative software rival Figma.

With a $20 billion price tag, this was hardly a gulp by a bottom feeder. In fact it’s reportedly the most ever paid to acquire a venture capital-backed company.

But it’s Figma’s price as a multiple of sales that is most instructive.

You see, Figma – which is still doubling sales year-over-year – is one of the generation of Software as a Service (SaaS) outfits that became ultra-prized in the home-working era.

While most US companies in the last bull market were re-rated to ever higher multiples of earnings or sales, SaaS companies became loftily valued on the basis of their Annual Recurring Revenue (ARR).

ARR is often presumed to be stable and predictable – almost like a tech stock annuity. People will pay up for presumed certainty.

And Adobe has just paid around 50-times Figma’s ARR to buy the company.

No, not 50-times profits. Not even 50-times traditional sales. 50-times ARR.

This is a sky-high value valuation by the standards of old-school investing. Yet at the peak of the lockdown mania many fast-growing tech firms were trading at such crazy multiples.

That was mostly how a company like video call sensation Zoom saw its shares go from $67 at the start of 2020 to nearly $560 by October that year. It’s back to $76 as I write.

Abracadabra

But given what Adobe sees in Figma… were those valuation multiples really so ‘crazy’?

Adobe should know its market as well as any investor or analyst. Its execs have been battling the brash upstart Figma for years and have now seemingly thrown in the towel. They surely guessed the market would take fright at the size of the deal – Adobe’s shares are down more than 20% since it was announced – yet they did it anyway.

Clearly, they believe paying 50-times ARR was worth it.

In contrast, the market presumably thinks either Figma isn’t worth $20 billion or – worse – that this deal smacks of desperation.

Maybe Adobe’s core business faces more competition than previously thought?

However, a more optimistic lens might view the deal as revealing that fast-growing and innovative technology really are worth paying for.

Maybe not what tech investors would stump up in 2021 (I don’t think Peloton’s shares are coming back any time soon…) and maybe not even what Adobe is prepared to pay to turn this potentially lethal competitor into another product line.

But possibly much more than such shares are now trading for, after their steep reversals.

If so, this could be as close as we’ll get to somebody ringing the bell for the bottom.

Magical thinking? Maybe. With war raging and central banks continuing to aggressively hike rates I wouldn’t expect a fairytale transformation from bear back to bull in a blink.

But as Tolkien wrote of weightier matters: “In the end it’s only a passing thing, this shadow; even darkness must pass.”

As goes demonic overlords, so go bear markets.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Have you read The Snowball – the biography of famed investor Warren Buffett?

Did you also feel a few pangs of jealousy?

I don’t just mean for Buffett’s Omaha neighbours, who backed the bargain hunter in his 20s and turned modest nest eggs into billions.

(Though I did send several pangs in their direction.)

No, as a stock picker it was the tales of Buffett uncovering companies trading at less than the cash on their books that I envied.

In theory, Buffett could buy these firms outright, extract the surplus moolah, and own the businesses for nothing.

Talk about a free lunch!

Of course, the market was inefficient back then. Buffett would travel to New York by train to delve for data buried in obscure filings that nobody else even bothered with.

Today, all that information is at the fingertips of countless tech-enabled hedge funds.

Besides, would I have been as dogged as Buffett in ferreting out these nuggets?

Truthfully, no. There’s only one Warren Buffett because nobody else did what Buffett did.

Anyway, it’s all moot because you don’t see value going begging in the market these days…

…do you?

Maybe.

10% off in the stock market

The hidden-value-in-plain-sight bargains I’m thinking about arise with investment trusts.

An investment trust is a fund that trades on the market, like any other share.

And like all funds, it owns a variety of assets.

Sometimes the holdings are unlisted or mysterious – property or private companies, for example.

But more often, trusts own a portfolio of other market-listed companies.

With such trusts you can easily tot up the value of all the investments. Adjust for any debt or cash on the balance sheet, and – hey presto! – you know what the trust is really worth.

In theory, an investment trust could liquidate itself by selling its portfolio and – after costs – you’d know exactly how much cash you’d be entitled to as a shareholder.

Yet despite such mathematical clarity, investment trusts often trade for less (or more) than this so-called Net Asset Value (NAV).

When trusts cost less than their NAV to buy, they’re said to trade at a discount. A trust with a NAV of 100p per share whose shares cost 90p are on a 10% discount to NAV.

Note there are no ifs or buts here. It’s not like saying you believe Tesco is worth 300p per share but the market prices it at just 250p.

With an investment trust that owns listed assets, you can know exactly what its portfolio is worth.

Hence, the discount to NAV isn’t an opinion. It’s a fact.

However, whatever the theory says, it’s all moot because an investment trust trading at a discount is hardly going to just liquidate itself and return the cash…

…is it?

One foot in the grave

Actually, trusts do wind themselves up and dole out the cash every now and then.

In fact, we’ve seen a high-profile example in just the last few days, with the Fundsmith Emerging Markets Equity Trust (FEET) announcing it aims to put itself into liquidation.

This came after the trust’s manager – Fundsmith LLP – told the trust’s board it will hand back the reigns of management.

Given that FEET is synonymous with Fundsmith – and its strident founder Terry Smith – there’s a somewhat formal dance going on here.

True the liquidation proposal is subject to a shareholder vote.

But I’m sure the board has already sounded out enough of FEET’s big shareholders to be confident its proposal will be ratified and that the trust will indeed be liquidated.

Because what is FEET without Fundsmith?

The whole point of FEET was to bring Fundsmith’s Midas touch to a new market.

But unlike Terry Smith’s flagship core equity fund, his firm’s emerging market offering has struggled ever since its 2014 debut.

FEET has delivered a total return of 44% since inception to the end of August this year. That’s well behind the 68% notched up by its benchmark.

Not so much a Midas touch as a Vegas shakedown.

And the share price has done even worse, lagging the NAV with a return of 22% over the period.

Which brings me back to that demonstration of value.

FEET kicked into life

The day FEET said it was seeking self-liquidation, its shares jumped by 10%!

This had little or nothing to do with any activity in the trust’s underlying investments.

Rather, the rise was purely because the market believes the discount sported by FEET will probably soon be closed by the trust selling all its investments at near to NAV, and giving the cash to shareholders.

Before the announcement, FEET traded at a discount of more than 15% to a 1,427p NAV.

After the announcement – and the share price advance – the discount had closed to just 6%.

A nice gain if you were lucky enough to be holding the shares when the news broke.

But it also raises a couple of interesting questions.

Firstly, why did it take a liquidation announcement for traders to get interested in the value clearly on offer with FEET shares?

And why does a 6% discount persist even now?

Best foot forward

Investment trusts may trade at a discount for many reasons – often at once – but it’s mostly centred on uncertainty over future returns.

Investors may doubt managers decisions are creating much value, or even destroying it.

Or it can be because an asset class has fallen out of favour, so there’s simply not much demand around. The torpor can easily lead to investment trust prices drifting away from NAV.

But often a discount seems almost emotional.

FEETs returns have rarely looked good versus an emerging market index fund. It’s even shifted its strategy along the way. The shares initially traded at a premium to NAV as investors bet that the Terry Smith stock picking magic would do it again for investors – the slow slide to a discount can only have amplified the disappointment. It certainly dragged on their returns.

In short, it’s all been a bit of a tumult.

However, with a liquidation ahead, future returns from FEET look relatively superior.

Shareholders will still get any return due from the performance of the portfolio, until it winds up.

But investors who held or bought at the initial wide discount also get a return kicker, in that the discount can be expected to close to near-NAV by liquidation time.

Remember: they will get cold hard cash at that point.

The return from the underlying holdings – and the emerging market index – will naturally fluctuate. But the relative return generated by closing the discount is almost assured.

There is a chance shareholders could vote down the liquidation. In that case, the board would need to find a new manager.

But even if it does wind up, there’s no sure timetable yet. We don’t know how much it will cost to sell FEET’s holdings, and whether the trust will need to price anything below market value to unload any outsized positions.

All of which also answers that second question: why does a small discount still prevail?

In a word: uncertainty.

Traders can’t be sure the liquidation will happen. If it doesn’t, it is very likely FEET’s share price will fall again. The persistent discount is a small margin of safety against these sorts of outcomes.

Look before you leap

If you like uncertainty, then hunting for investment trust bargains can be addictive. But it’s often frustrating.

Some investment trusts stay on huge discounts for years, or even decades. Not everyone is as savvy or principled as Terry Smith. Often only an activist investor buying into a trust will force its board to do anything to realise the value marked down by a big, persistent discount.

Some boards have seemed content to let a discount linger on for years while they collect their fees, which does a great disservice to existing shareholders.

You should also always check to make sure there’s not a technical reason why the discount cannot be closed – often seen with family run trusts that cannot buy back shares without triggering takeover rules – or that the NAV you’re working off is more than just a finger in the air kind of exercise, as can happen with private equity trusts and others that hold unlisted assets.

Okay, I admit it’s not quite as easy as it was for Buffett buying cash marked down in the market. But in today’s very efficient market – and with a dose of luck dolloped in – buying an investment trust that you know is worth more than its shares trade for might just be the next best thing.

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The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

“One of the guys from tech support will be up in a minute,” your manager says with a welcoming smile. “They’ll get you onto email and the other services”.

She then disappears into a three-hour meeting.

There’s no sign of the tech support guy. You can’t get past the screensaver log-in.

The minute hand on the office clock ticks slowly around.

Is 12pm too early for lunch?

Liz Truss’s first day at the office was surely nothing like that.

Action stations

Rarely outside of war has a new Prime Minister faced such a towering in-tray marked ‘Urgent’.

Indeed, our latest leader doesn’t even have peace on her side. Britain is an ardent backer of Ukraine against Russia, after all.

Russian aggression is also behind the energy crisis that must be Truss’s first order of business.

Civil servants, MPs, and lobbyists alike will also be tugging at her sleeve for action to resolve the post-Brexit stalemate in Northern Ireland, the wider cost-of-living crisis, action on climate change after an exceptionally dry summer – oh, and she’ll need to rehabilitate the reputation of politics after the scandals that toppled her predecessor and gifted her the opportunity.

Not to mention the NHS seems one last Covid wave away from collapse.

It’s quite a To Do list. The priorities of everyday investors like you and me won’t be front of mind.

Yet investing is what we do at The Motley Fool. And long-term saving and investing is vital if we are all to live our best lives without becoming a burden to the state.

So what would we press the new Prime Minister to get on with?

Energetic action

Tackling the energy crisis has rightly been top priority for the new administration, with a raft of new measures announced on Thursday.

The energy regulator Ofgem had set a price cap for October at £3,549 – an 80% rise in six months. Experts scrambled to predict ever-higher charges, and one recent forecast would have put the cap at £6,552 in April 2023, before Thursday’s announcements.

Such bills would have crippled many households.

Less reported has been the impact on businesses. Prices here have not previously been capped at all.

Smaller FTSE 350 and AIM companies in the hospitality and manufacturing sectors – low-margin at the best of times – could have been crushed by sky-high energy costs.

The consequences would have rippled through the economy.

So investors have many reasons to applaud action on energy prices – not just as bill payers.

Of course, there will be a price to government intervention. Higher taxes now or in the future.

But it’s really a matter of pick your poison. Not acting was not an option.

Pounding the table

Government action on the energy crisis does pile more pressure on our creaking public finances.

At the latest count, UK public sector debt stood at £2,348trn – or 96% of GDP.

The highest level since the 1960s.

Moreover, the UK is running a record current account deficit of 7% to 8% of GDP.

This difference between the level of UK exports and imports is financed by overseas capital – the “kindness of strangers” as former Bank of England governor Mark Carney once put it – or if not then perhaps by the IMF, as Britain saw in the 1970s.

The UK has the highest inflation rate among G10 nations. Productivity gains are stagnant.

Meanwhile the Bank of England predicts an imminent recession, even as it raises interest rates.

Higher interest rates in turn increase the cost of servicing government debt.

All bad! But not yet a reason to panic.

UK government borrowing has a lengthy maturity profile. We won’t struggle to meet our obligations anytime soon.

But investors must hope Truss can retain the confidence of international capital. Campaigning talk about reviewing the mandate of the Bank of England, for instance, should be kicked into touch.

The weak pound is partly a gauge of investor uncertainty. A pound now buys just $1.15. Some City analysts believe we’re headed to parity with the US dollar.

This weakness makes imports (including energy) more expensive and fuels inflation.

British money buys less on the global stage. Not something we investors should root for.

Taxing matters

Another of Liz Truss’s campaign pledges was to reverse former chancellor Rishi Sunak’s planned rise in corporation tax.

Putting aside the question of funding the reversal, this would be good news for British companies.

A simple price-to-earnings ratio tells us companies that retain more of their earnings are more valuable.

And paying less tax leaves more cash to reinvest, raise wages, reduce debt, or pay dividends.

A lower corporation tax regime might also attract that overseas investment.

Truss has also pledged to reverse this year’s 1.25% National Insurance rise.

There’s even aspirational noises about cutting income tax.

Tax cuts put more money into people’s pockets – and give us more money to invest, of course – but unless the cuts boost growth they will also further pressure the UK’s public finances.

Personally, I’d prefer a pro-growth agenda focused on innovation and the technology firms of tomorrow.

Fools know that investing broadly in the tech sector today means putting money to work overseas. Domestic opportunities above the micro-cap scale can be counted on one hand.

An expanding UK tech sector could be good for our returns, as well as for Great Britain PLC.

Allow me

One area no politician talks much about these days are the savings allowances for ISAs and pensions – including the lifetime allowance for pensions.

That’s understandable. For the past few years Britain has lurched from one thing to another. ISAs, for example, were born and boosted in more prosperous times.

Nevertheless, the fact is the annual ISA allowance has been frozen at £20,000 since 2017.

The annual allowance for tax relief on pension savings has been £40,000 since 2014.

The pension lifetime allowance has been at or just above £1m since 2016. In 2012 it was £1.8m!

These might seem generous allowances in the midst of a cost-of-living crisis.

But by freezing them, their attractions atrophy – even faster with double-digit inflation.

Raising these allowances won’t be a priority. But for investors, there is no surer uplift to our long-term returns than sheltering them from the ravages of taxation.

She’s got mail

Lastly, Truss has vowed to sweep away EU regulations in light of Brexit.

I’d question though whether there’s much red tape to be thrown on the bonfire when it comes to financial regulation. Not if we are to protect consumers and investors.

Any listener to Radio 4’s Moneybox knows there are enough dodgy outfits around to warrant even tougher regulation.

That said, I was glad the Financial Conduct Authority made changes to the EU’s Key Information Document (KIDs) rules. The EU-mandated disclosures often shed more confusion than light.

The FCA is now undertaking a wider review. And perhaps there are other ways in which UK regulation can be better tailored towards the UK’s more self-directed investing environment.

But I’d put financial stability top of my investor wish list, followed by higher savings allowances. Let’s just hope Prime Minister Truss has been set up with email and is on the case!

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Even schoolchildren learn about the hyperinflation of 1920s Germany.

By late 1923 the German mark was losing value so quickly that its workers were paid twice a day.

People pushed wheelbarrows full of near-worthless banknotes to the grocery store. Others reverted to the barter system. A baker might swap a loaf of bread for a few turnips rather than accept paper money that would soon be good only for kindling.

Of course what makes Germany’s hyperinflationary warning especially potent is it helped set the stage for the rise of history’s most murderous failed artist.

But periods of relentlessly soaring prices are not so unusual.

Did you ever hear about the inflationary explosion in early 1990s Yugoslavia?

Between 1988 and 1994, inflation in the now-defunct country ran so high its central bankers were adding zeroes to bank notes with every new issue.

With prices doubling every few days – every 34 hours at the peak – that was a lot of zeroes.

Rumour had it the bank began to slap images of random children on its notes instead of the usual scientists and philosophers because the paper wouldn’t be in circulation for long anyway.

The country’s financial mandarins eventually released a 500 billion dinar banknote.

Stand aside Bobby Axelrod! In 1990s Yugoslavia anyone could be an unhappy billionaire.

Up, up, and away

For a long time these bouts of hyperinflation seemed more like fairy stories than cautionary tales.

Inflation was moribund in the West for two decades, with near-zero interest rates since the financial crisis their barely perkier partner.

But we all know that changed in 2022.

Like snow falling in King’s Landing, a bleak inflationary climate is upon us. Every week seems to bring a worse forecast than the last.

Goldman Sachs has just said UK inflation could top 22% by spring unless high gas prices abate.

By the time you read this, its City rivals may have topped even that guesstimate.

We’re not yet buying pints with £50 notes – and we hopefully won’t be anytime soon – but the direction of travel is uncomfortable if you’ve read your economic history books.

High finance

Employees are already pressing for big pay rises – and striking for them like it’s the 1970s – and the cost-of-living crisis is front page news.

But it’s not just as shoppers and bill payers that we must recalibrate to the inflationary times.

As investors, too, we should understand inflation can do funny things to the financial landscape.

So far the biggest impact on most portfolios has been the re-rating of growth stocks.

To tame inflation, central bankers raise short-term interest rates.

Meanwhile market forces lift longer-term interest rates as savers demand higher yields as compensation for inflation eroding the real value of their money.

Far-off company earnings become less valuable when discounted back to present values. Investors have a greater preference for cash today, and put a lower multiple on jam tomorrow.

This shift drove the de-rating in technology stocks we saw earlier this year (exacerbating a sell-off of the Covid darlings already underway as economies re-opened).

It may sound a bit arcane, but Microsoft’s share price is ultimately down for the same reason the price of eggs is up.

And there are other more tangible impacts of inflation that investors should think about.

Ins and outs

So-called value stocks did well initially, as interest rates rose and those growth stocks sold off.

But many value stocks are poorly placed for enduring high inflation.

True, such firms usually churn out cash. Relatively less weight is given to future earnings.

But these companies also tend to have factories, trucks, and other physical assets that require repairs and upgrades to stay in business.

As inflation races higher, these capital and maintenance expenditures climb too.

Sales may rise, but margins are squeezed by the escalating demands on cashflow.

In contrast Coca-Cola’s brand or the Google search engine don’t need rebuilding every few years.

Yet such dominant companies also have the pricing power to prosper with inflation.

Intangible assets do require some maintaining. Coke’s marketing budget is huge!

Nevertheless, as Warren Buffett pointed out in the inflationary 1970s, this dynamic can actually make paying more for capital-light businesses with strong moats preferable if inflation persists.

More or less

At the same time, fast-rising prices can flatter even quality companies’ earnings.

Unilever saw turnover rise 14.9% in its recent first half.

Rival Reckitt’s revenues rose just 4.4%.

At first glance Unilever is knocking it out of the park.

Dig deeper though and you’ll see the volume of goods sold by Unilever actually fell by 1.6% in the six months. Back out currency moves, and most of its sales growth was due to higher prices.

Or, said differently, inflation.

In contrast Reckitt grew volumes by 1.2%. It raised prices but it also managed to sell more stuff.

So which firm is doing better?

To be clear, shareholders of both should be heartened they have demonstrated they can raise prices.

My point is that in the low-inflation era we often applauded even single-digit sales growth.

But high inflation raises the bar.

Accounting for it

There are plenty of other ways inflation may change how you evaluate a company.

High debt at a REIT might be more attractive if it was secured at low long-term interest rates.

Inflation running above 20% would soon whittle away the borrowing burden, while the assets – its properties – should keep pace with price rises over the medium term.

Or how about management performance metrics?

Nominal sales and profit targets are going to be much easier to meet if high inflation keeps puffing up the income statement.

You’ll also need to watch for the impact of particularly critical input prices, such as energy.

Soaring gas and electricity bills could soon cripple low-margin sectors like hospitality.

The high life

If this all seems a lot of extra hassle, spare a thought for managers trying to run their operations.

Indeed for most economists, the biggest problem with high inflation is how much harder it makes forward planning and capital allocation decisions, in both business and daily life. Wheelbarrows of cash are out of fashion in our digital world. But runaway inflation would still be just as burdensome.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), Reckitt plc, and Unilever.

In Time’s Arrow – a mind-bending novel by Martin Amis – time runs backwards.

Everything that happens proceeds from what we’d consider the future into the past, and the novel’s protagonist struggles to make sense of it all.

• Doctors harm their patients, who walk into hospitals healthy and leave sick and injured
• Burglars are saints who secretly distribute their wealth via broken doors and windows
• Most people become conscious as befuddled pensioners, then experience their last day at the office, a slide down the corporate ladder, and finally school
• Rather than dying, people become babies reunited with their mothers

Bonkers, sure. Yet from a certain perspective Amis’ fantasy world makes more sense than ours.

We constantly prepare ourselves for days to come we know nothing about.

Whereas in Time’s Arrow the hero muses:

“How many times have I asked myself: when is the world going to start making sense? Yet the answer is out there. It is rushing towards me over the uneven ground.”

In Time’s Arrow, life is a punchline where you wait for the delivery.

Whereas as Apple founder Steve Jobs said of our lives:

“You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future.”

Bullseye

The stock market can also seem like an alternate reality.

For instance, shares may go up even when things in the real world look bleakest.

The 2020 market rally as the pandemic unfolded was a textbook example.

After nosediving on fears about the new coronavirus, shares promptly reversed course and soared – before lockdowns had barely begun beyond China, and ahead of two years of stop-start economic growth and millions of lives lost.

To the uninitiated, investors were acting like the crazed members of a death cult.

But one of the most important things to grasp about the stock market is it looks forward.

A share price rarely represents what’s happening this instant.

Rather investors peer months – years – ahead to guess how things will be, and to estimate the future earnings of a company.

Working backwards, this enables them to estimate a fair price to pay today. Regardless of the headlines.

Prices rallied in 2020 because the market had sniffed out the limits of the pandemic’s destructive power, as well as being reassured by the actions of central bankers and politicians.

The world was not ending. Life and business would continue. Companies were still worth owning.

Indeed with the benefit of hindsight it went too far.

Some investors priced in a forever where we always worked and shopped online and barely went to a restaurant. One where super-low emergency interest rates never rose again.

But in 2022 we’ve subbed out Zoom for the commute, and chosen holidays over Amazon binges.

Interest rates have risen, as inflation returned in force.

Frothy share prices have crashed back to reality accordingly.

A shot in the dark

So the market looks forward to the future. But it doesn’t know the future.

In that gap lies the uncertainty and risk of investing.

In fact it’s not even clear it’d be easy to profit if you knew exactly how events will unfold.

Imagine you were in a fairground tent in 1999 peering into the only working crystal ball this side of The Lord of the Rings.

A suspiciously impoverished fortune teller says you’re seeing 2022. You both gaze in wonder – just like the people you see through the mists of time gazing into their smartphones and computer screens.

The techno-prophets are right! The Internet really will takeover the world!

You sprint home to buy shares in all the technology stocks you can.

Although this being 1999, you must wait for your dial-up modem to connect you to your sort-of-cheap broker, then pay extra because you’re buying US tech firms…

But never mind. You’ve seen and own the future!

Yet over the next three years the Nasdaq tech index will fall more than 75% from its peak – and many of your Dotcom stocks go bust.

Crystal balls indeed.

Stay on target

More recently, imagine you knew in 2016 that Donald Trump would become US president.

Pundits predicted four years of political chaos and a stock market crash if the outsider won.

We saw the chaos. Yet equities rose during most of the Trump presidency.

The difficulty of both predicting and pricing in the future is why we focus on individual company fundamentals at The Motley Fool.

It doesn’t solve everything. You can still be wrong about a firm’s prospects.

And if everyone sees the same bright future then it’s easy to overpay.

But by avoiding politics, macroeconomics, or even the outcome of a pandemic, we can better restrict our forecasting to things that management can actually control.

These executives are surely no better than us at predicting interest rates or election winners. But the best can spot and back promising new products or services that will do well regardless of what happens, and swiftly trim payroll if the economy turns south.

My aim is true

At least we can count ourselves luckier than Fools in the alternate universe of Time’s Arrow.

True, as time flows backwards, they’ve already seen the future.

But what good does it do them?

In their reality, the global economy gets ever-smaller, profits dwindle, and share prices shrink.

Their long-term market graph starts high and to the right, and slowly retreats lower to the left.

But back in our real world, we’ve seen decades of economic growth drive productivity, living standards – and ultimately the markets – higher.

Indeed over the last 122 years, global equities have delivered an annualised real return of 5.3% (in dollar terms) compared to just 2% for bonds and less than 1% for cash.

It’s not always smooth. And it’s rarely easy. But trusting in the future has seen the best returns go to equity owners willing to put up with not knowing exactly how it will unfold.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, Apple, and Zoom Video Communications. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.