Probably the best book out there for long term value investors is Benjamin Graham’s book, The

However, the last issue is from the 1970s so I will go through the book in a series of weekly articles in order to extract what is still relevant. Believe me there is plenty of it relevant, especially in this stock market. This will allow us to compare the current market with essential value investing wisdom and perhaps improve our risk reward perspective on things.

Welcome back to the Intelligent Investor series. This post reveals Graham’s stance on inflation and what the 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 begins by explaining how inflation needs to be in your considerations of not just your end investment successes , but in choosing an investment vehicle that performs best in a given inflationary circumstance. He makes note that, once again, the investor is able to make use of past data to position his assets in a way that will compliment inflation.
Graham focuses immediately on the concepts that inflation will be felt most with portfolios that focus on fixed dollar income rather than ones that vary with the market. Essentially stating that high-quality common stocks have typically been able to better accommodate desired returns during periods of high-inflation. He’s comparing this to bond yields that would typically be eaten up by inflation. He admits though that stocks may perform better than bonds , but there will always be two influences on those equity markets:
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
Graham’s point being two-fold here:
We can assume that common stocks will outperform bonds, but we cannot be sure of it
The investor should then position his holdings to be adjusted for some level of uncertainty that stocks would under perform bonds rather than an all-stock strategy.
Eventually, Graham goes on further to describe that the markets have also shown that investing in “things” as a hedge against inflation has not turned out to be a prosperous venture in the past. He suggests: rather than buying into physical things , the investor is again speculating on the future price and value of the object. Zweig notes here that an investor under the age of 65 would actually do well to have about 2% of their financial assets in a fund exposed to precious-metals, rather than buying the metals outright. The point he remarks here is that the 2% holdings is too small to affect your returns if it does poorly, but can help offset losses due to inflation.
Ultimately, Graham agues that :
The more the investor depends on his portfolio and the income therefrom, the more necessary it is for him to guard against the unexpected and the disconcerting in this part of his life.
Zweig’s commentary on this chapter was concise and relevant.
He reiterates the importance for the investor to understand his investing success in terms of how much you keep after inflation. One should recognize how this concept relates so centrally to Graham’s philosophy of protecting your principle. I got interested in checking out inflation against my after-tax results and was surprised at how neatly the data is presented on current and past inflation here, but I so rarely hear other investors talking about their gains compared to rates of inflation.
One of Zweig’s greatest contributions was the graph that shows how stocks performed based on various inflation rates:…(read more)

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

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“Intelligent Investor” by Benjamin Graham is a classic book that teaches investors various strategies to succeed in the stock market. In chapter 2, Graham discusses the topic of “Investing and Inflation,” which is still relevant today.

Inflation is the decrease in the purchasing power of currency over time. It means that the same amount of money can buy less today than it could in the past. Graham highlights that inflation can be both a threat and an opportunity for investors.

One of the threats of inflation is that it can erode the value of an investor’s portfolio. If the rate of inflation is higher than the rate of return on investments, then the investor is essentially losing money in real terms. Therefore, it’s essential to consider how inflation impacts the investment decisions.

On the other hand, inflation can also create opportunities for investors. For instance, companies that can pass on the cost of inflation to customers can maintain their profitability. Similarly, companies that have tangible assets such as land, machinery, and real estate can benefit from inflation as the value of their assets increases over time.

To counter the effects of inflation, Graham recommends investing in stocks that have a history of paying dividends. Dividend-paying stocks tend to perform well during inflationary periods as companies can increase their dividend payouts to keep pace with the rising cost of living.

Another useful strategy is to invest in bonds that are linked to the inflation rate. These securities provide a guaranteed return that keeps pace with inflation, protecting the investor’s purchasing power. Treasury Inflation-Protected Securities (TIPS) are an example of such bonds.

Finally, Graham advises investors to diversify their portfolio to protect against inflation risk. By investing in a mix of stocks, bonds, real estate, and commodities, an investor can hedge their portfolio against inflation and reap the benefits of different asset classes.

In conclusion, Graham’s insights into investing and inflation remain relevant. While inflation can erode an investor’s returns, it can also create opportunities for those who understand it. By following Graham’s advice on investing in dividend-paying stocks, inflation-linked bonds, and diversification, investors can protect their portfolios and succeed in the stock market.