Own that which has little supply

When investing, I think there is merit in understanding what has great demand but perhaps more importantly, where there is ample or excess supply.

Some of my recent thinking on this topic has moved away from commodities but into financial securities or instruments.

If the world has so much government debt on issue, why would you want to own something that is so abundant? Yet bonds are being bought and sought and prices continue to rise.

Inversely, the supply of equities continue to shrink, driven by mergers, stock consolidation, lack of new issues and growing amounts of share buy-backs.

The growth of share buy-backs has been occurring by stealth. Many companies are choosing to buy their own shares back with their excess cash, for reasons that I can’t see as positive.

Perhaps this means management from a particular company can’t find appropriate investments or they are cautious about deploying more capital into their existing business, but either way, it improves a company’s “earnings per share” data. This in turn helps executives meet share performance data tied into their compensation.

In fact, with money so cheap, it’s actually accretive to borrow money and buy your shares back.

Putting manipulation aside, there is a shrinking supply of equity and especially in Australia where the amount of amount of excellent companies with high quality of earnings are diminishing.

This is a positive, for that huge pool of superannuation money in Australia will only ever invest within its own shores.


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