Inflation
•
•Fixed income investments fare worse during inflationary
periods than
do common stocks.
•During
inflationary periods, firms can increase
prices, profits, and dividends causing their share price to increase and offsetting
declines in purchasing power.
•
•In
1970, the most probable average future rate of inflation was 3%.
•The
investor can not
count on more than a 10% return above the net tangible assets of the
DJIA.
•This
is consistent with
the suggestion that the average investor may earn a dividend return of 3.6% on
their market value and 4% on reinvested profits.
•
•There
is no underlying connection between inflation and the movement of common stock
earnings and prices.
•Appreciation
does not result from inflation, but rather from the re-investment of
profits.
•The
only way for inflation to increase common stock values is to raise the rate of
earnings on capital investment, which it has not done historically.
•
•
•Economic
prosperity usually is
accompanied by slight inflation, which does not affect returns.
•Offsetting
factors include
rising wage rates that exceed productivity gains and additional capital needs
that cause interest rates to increase.
•The investor has no reason to believe that he can achieve average
annual returns better than 8% on DJIA type investments.
•
•Graham
describes alternatives to common stocks as a hedge against inflation.
•These
alternatives range
from gold and diamonds to rare paintings, stamps, and coins.
•
•Gold
has performed poorly, far worse than returns from savings in a bank
account.
•The
latter categories, such as paying thousands of dollars for a rare coin, can not
qualify as an “investment operation.”
•
•
•Real
Estate is still another alternative; however, its value fluctuates widely, and
serious errors may be made when purchasing individual locations.
•Again,
the defensive investor is best served by purchasing a portfolio of carefully
chosen common stocks and bonds.
•
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