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The Intelligent Investor: Chapter 2

The Intelligent Investor: Chapter 2

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Published on May 21, 2016

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0:02data to be mean graham's the intelligent investor this chapter is called relation
0:09and studying listing this chapter has three learning objectives so let's look
0:14at the first one was inflation
0:17ever been out shopping only to suddenly discover and their prices has sort the
0:22reason for this is inflation and for the investor it's a very expensive tax
0:26dollars are forgotten
0:28when reading the Intelligent Investor I think it's interesting than being mean
0:32gramm already dresses the concept of inflation in the second chapter he
0:36doesn't talk about how to pick the best stocks and bonds at least not yet know
0:40he talks about inflation the impact of inflation is easy to approximate say
0:45that the car stuff when cold last year was one dollar and inflation has been to
0:49resent the price would not be $1.02 so basically if your income is date the
0:55same you have now become 2% poorer means you lose purchase power most employees
1:02today don't feel the impact as much as you would expect the reason for this is
1:06that just salary to correlate to some degree with inflation and sometimes more
1:11so if you get a 3% increase in pay inflation is to resend you can now
1:16afford one percent more as you can see is important not to look at the price
1:21tag which is the number of price but relative but you can buy for the amount
1:25of money you have that is the real price so you might be thinking why does
1:30Benjamin Graham put so much emphasis on inflation I would rather learn to find
1:36the most profitable stocks well that's fair enough and we'll get to that russia
1:41now understand the impact inflation is crucial because it reveals secret that
1:46very few investors fully grasp when it comes to the distinction between stocks
1:51and bonds so this basically takes image of the second objective was inflation in
1:56non-domestic first let me start by providing you a fifteen seconds crash
2:01course in pants
2:03a bond is really an IOU in other words if the same as alone if Robert issues a
2:10$1,000 to nearby and 23 percent a year he has to pay $30 interest each year and
2:18in years she has to pay the $1000 back simple right as you can see bond
2:24investing is simple but ask me Graham parts out you have to be very careful
2:29when evaluating the real profits for Patricia you both have to account for
2:34inflation and obviously also had to pay the actual tax if you receive the us-
2:40depends on both the type of barbed and the tax break not to mention the tax
2:45rules variations internationally but for simplicity let's assume generic 30
2:50percent tax rate so after-tax Patricia's return is now only 2.1% went deducting
2:57taxes wait it gets even worse with a two-percent inflation patricia is true
3:02prophet is now point one percent if you're a bond investor you should follow
3:07inflation very close as you can see the tax of elation is much higher than what
3:14you paid the government that leads me to the third learning objective leyshon and
3:20start investing remember how you as shareholder basically only a tiny
3:24portion of real business and the value shares directly correlated to how the
3:29business performs
3:30is important to remember this when you consider how businesses affected by
3:34inflation because just like a cold becomes more expensive for me as a
3:39private consumer so does the raw material costs for a business when the
3:44cost increase for coca-cola they raised their prices to to mention the profit so
3:49let's see how this works in practice real estate investment is an
3:53accompanying that are selling handbags women before inflation the price of a
3:58handbag was $100 so what cost $80 the prophet is now $20 per back now what
4:06happens with the Childress inflation this is the same number as before but
4:10the difference is that I had two percent of the numbers as you can see contrary
4:16only a bond inflation is fully reflected in increased profit as a shareholder so
4:22before you start to the actual reformers of the company in that year the effect
4:27of inflation doesn't affect the company s opposes the higher costs back on the
4:32consumer now the purchase power of 20 port $4 is the same as the $20 the year
4:37before Obama is not better off but when it comes to inflation for the stock
4:42investor it's not about how to take advantage of inflation but it's actually
4:47how to mitigate the costs
4:49stocks are simply better protected them balance so if we for simplicity look
4:55away from the capital gains tax then consider this example with a two-percent
4:59inflation as we saw earlier patrice just three percent return in bonds now only
5:05worth one percent real return robert is making well we actually don't know but
5:10let's assume 7 percent which is what these stock market historically has
5:14returned before inflation
5:16that's actually seven percent real return it even if we include inflation
5:23it would be less relevant because the inflation the Fed as we saw in the
5:27example with the handbags is fully reflected in an increase in profit
5:32lets some object to the Intelligent Investor first balloon inflation asst
5:38the price for cokes and almost all other groups consistently increase in price we
5:44also learned that we shouldn't look at the price hikes of the goods we buy
5:47instead we should look at the purchase power of a paycheck that is what makes
5:53it interesting
5:54many people might not notice the impact inflation the day you live but if you
5:58are an investor who should be fully aware of how inflation impact your
6:03return we saw the Patricia brought upon at three percent at a two-percent
6:08inflation rate her real German only one percent so if you invest in bonds you
6:13should know that inflation directly either way your profit we also so
6:17Roberts investment in companies oldham packs since his shell holder and his
6:23returns of directly a function of the profit the company makes is not affected
6:27by inflation because as the cost of making the hamass increase from freshen
6:31the price the company cannot shots climbs up to
6:34everything else equal if there is high inflation you might want to look closer
6:39at stocks them balance this subject to choose the Intelligent Investor I hope
6:45your what's the next chapter where we learn how to calculate how profitable
6:49stock investing is right now