In this video we discuss how inflation affects stocks and how an investor should be protected or no, from chapter 2 of The Intelligent Investor.
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The Intelligent Investor - Chapter 2 - Investing & Inflation
Good they feel investors hope you doing great today. I get better days because I have a flu. So you won't be seeing me. But nevertheless when you're sick what's best to do it's to take a nice book and go through it. So we're continuing with Graham's Intelligent Investor Chapter 2 inflation and the investor. Let's immediately start the book has been written at least the last edition in 1971 when inflation was a pretty big deal and especially in the following 10 years from 1971 till 1982. That is why it's so interesting to read the book now because it shows how the best investors Bram in this case were thinking about it back then and underestimating what actually happened when the book was rate than inflation was at five point eight percent which is significant and many considered bond as terrible investments where the only option were stocks. However as Graham often points out the Dow at 900 was crazy for him. And it is exactly what happened later that shows how precious he was. The Dow didn't go anywhere between 1965 when it reached 900 1000 points the first time deal. Nineteen eighty two eighty free. Also when the book was written it was still in the same limbo period. That is because of inflation not the fan of fingernails because valuations were very very stretched back to inflation Gram's looks at what was the case with inflation in the past. And we can see on the table that there were periods with high inflation and long periods with low inflation. This doesn't tell us anything about what will happen.
So we have to be prepared for anything that can happen something interesting. Graham writes and is something to keep in mind. I quote There are some reasons to believe that the federal policies will be more effective in the future than in recent years. This statement shows how weak the Fed is and how things can get out of control and we should keep that always in mind in order to sleep well. This leads us to the question Are stocks the only and best inflation protection Gramps answer is a definitive no where he says that stocks might do better than in the past but might also do worse. Graham tells us that there is no correlation between stocks and inflation. Because from 1965 to 1970 cumulative inflation was 22 percent. While stock prices and stock earnings had declined in the same period when he digs deeper he finds that there is no correlation between inflation and higher earnings. Something very interesting that he mentions in the book Night we are talking 1971 but can be applied to this situation now is that from 1950 to 1969. Corporate debt increased five fold while corporate earnings only doubled. With higher interest rates and inflation the debt becomes a bigger a bigger burden. Needless to say in the last 10 years U.S. corporate debt doubled. S&P 500 earnings didn't increase at all. I would conclude with the most important thing that I got from Chapter 2 which are the following two questions. What will happen over the long term future say 25 years and what will happen to the investor both financially and psychologically over the short or intermediate periods saved five years or less. And here Graham says something extremely important about investors.
I quote his frame of mind his hopes and apprehensions his satisfaction or disconnect with what he has done. Above all his decisions what to do next are all the terms and not in retrospect of a lifetime of investment but rather by his experience from year to year. Here Graham tells us to think about how we invest. Are we influenced by what happened last year. Or do we take a 25 year long picture. My message is that investors should take a 25 year long picture which means that we might see much higher inflation in the future which means that we should protect ourselves and this will be the topic of tomorrow's radio. How am I protected. How would I protect myself from inflation so that I can sleep well.