The Intelligent Investor: The Investor and Inflation

There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices.

In 50… five year periods (or 78% of the time), stocks outpaced inflation. That’s impressive, but imperfect; it means that stocks failed to keep up with inflation about one-fifth of the time.

This chapter did two things for me:

  1. Dispelled the myth that common stocks protect against inflation
  2. Made me realize that despite being a citizen of Canada and a resident of North America and the West, I do have to worry about inflation

Kind of weird, right? The first misconception argued to invest in common stock, while the second encouraged me to invest in bonds, now it’s the opposite. I still don’t really know what to do, but I’m seeing that is a theme of the book. It’s not telling me what to do. In fact, using real data, it’s breaking down the naive notions I had about what to do that would’ve lead to ruin. It is building a framework that allows me to make judgements using current socio-economic conditions while cautioning me about risks and setting expectations.

Popular methods of protecting against inflation has been investment in gold, real-estate and assets. But gold has historically failed in protecting against purchasing power. Buying real-estate is subject to wide fluctuations and pricing mistakes, and doesn’t allow for diversification. Finally, the authors were out of their expertise when it came to purchasing assets such as watches and paintings. The chapter commentary listed better options: Real Estate Investment Trusts (REITS) and Treasury Inflation-Protected Securities (TIPS). REITs, as I understand it, allow diversified real-estate investment. TIPS advance their value automatically with inflation with the full faith and credit of the U.S government making them virtually risk-free. It is recommended to keep at least 10% of your money in these types of investment.

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