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Steve's note: Today's essay comes from Alex Green. Alex is a good friend of mine, and one of the best investors I've ever met. For his unusual idea on how to beat inflation, read on...
The Ultimate Inflation Hedge Is Revealed...By
Saturday, August 16, 2008
Investors looking for the ultimate inflation hedge have few attractive choices right now...
Real estate is fine under ordinary circumstances. But the housing market is in a death spiral. And we're still a good ways from the bottom, in my view. The barbarous relic – gold – is another good choice, usually. But gold has already appreciated from just over $300 an ounce six years ago to almost $900 today. It could be a little late. And inflation-adjusted Treasuries have moved up so much over the past year that they're currently yielding less than 1%. That's an awfully steep price to pay for inflation protection. So where can an investor put money to work today to hedge against the risk of higher inflation?
This may seem counterintuitive at first. After all, inflation devalues corporate earnings, the major driver of stock prices. But the mere presence of inflation also indicates that many companies are successfully passing along price increases to customers. This allows stocks to rise even when inflation is climbing. In 1980, for example, the Consumer Price Index rose by more than 12%. Yet the stock market rose 32%. And while the average rate of inflation throughout the 1980s was an uncomfortable 5.6%, it still turned out to be a great decade for stocks: The S&P 500 rose by an average of 12.6% a year. A recent analysis by Ibbotson & Associates found that in inflationary periods – as measured from troughs to peaks – going back to August 1972, some six of 10 market sectors in the S&P 500 actually gained ground. So don't let anyone persuade you that you should bail out of stocks and into precious metals, commodities, and real estate investments. Sure, these asset classes should make up a portion of your portfolio, but certainly not the bulk of it. Dr. Jeremy Siegel, a professor of finance at The Wharton School of the University of Pennsylvania and author of Stocks for the Long Run, has done a thorough historical study of the returns of different types of assets over the past couple hundred years. What he discovered is dramatic: The odds are good, of course, that you weren't around a couple hundred years ago. And, unless something truly exciting happens soon in the field of cryogenics, you won't be around 200 years from now, either. It's not necessary to think that long term, however... Start whenever you want and you'll find that when measured in decades the investment opportunities and returns for different asset classes are remarkably consistent.
For the past 200 years, nothing has come close to matching the long-term compounded returns of common stocks. It's hard to imagine that anything ever will. That's why you don't hear about the world's great investors – men like Warren Buffett – selling their stocks. They're too busy doing the smart thing: Putting their money to work in great companies at fire sale prices. Regards,
Further Reading:
Why Tiffany Beats Gold as an Inflation Hedge Market NotesANOTHER REASON TO OWN "NATTY"
In yesterday's edition, we described Jeff Clark's favorite trade right now: Buy natural gas. We displayed a chart showing how "natty" is extraordinarily stretched to the downside in its crude oil relationship. This week's chart (originally published inAdvanced Income) is the second reason to go long natural gas with Jeff's recommended trade. It's a 10-year chart of gas, showing its tendency to rally at the end of summer. As Jeff puts it: "Natural gas prices bottom in the summer and then rally through the fall. It's the most consistent trading pattern I've ever seen. "It's natural to doubt the validity of a trade that – Brian Hunt |
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