The Intelligent Investor-Chapter 2 Key Points (Summary)
Welcome back to the Intelligent Investor series. This post reveals Graham’s stance on inflation and what an “Intelligent Investor” can do to maintain consistent results that protect their buying power. The preceding posts on the Introduction and Chapter 1 can be found here.
The chapter starts with Graham being highly emphatic on the point that inflation is felt the most by investors with portfolios that have fixed dollar incomes rather than the portfolios which varies dynamically with the market. Graham admits that high quality stocks would prefer way much better than bonds, but there will always be 2 influences on the equity market :
The investment results over the long-term.
What is likely to happen to the investor financially or psychologically as the investor’s demeanor does not span his life, rather, around 1 year investment goals.
In a nutshell , according to Graham : “There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices”. Also, Graham has emphasized multiple times that one should always look for high-quality stocks since they tend to give better returns during inflation.
Alternatives to Common Stocks as Inflation Hedges
According to Graham, investors under the age of 65 should always have about 2% of their financial assets in a fund exposed to precious metals such as Gold and Silver, instead of directly buying the metals.
In this way, one can leverage from the fact that the individual doesn’t really need to spend an annual depository/storage fees for storing such precious metals and at a same time the individual would definitely get better returns over the course of time, had they invested in ETFs or other Precious Metal Funds instead of physically selling them.
The cardinality of the above statement lies in the fact that 2% of the total financial assets is way too small to affect your returns if it does poorly, but can help offset losses due to inflation.
Zweig’s commentary on this chapter was apt. According to Zweig, the best way to face and overcome inflation is to invest in “two inflation-fighters” investment :
Real Estate Investment Trusts, or REITs.
Treasury Inflation-Protected Securities, or TIPS.
One of Zweig’s greatest contributions was the graph that shows how stocks performed based on various inflation rates:
As I continue to work through the chapters, my goal is to post on each chapter’s central tenets.
Recommend the article if you found value in it and would like to follow along.
-Nikhil
