We will skip the more basic chapters (such as Chapter 1: Investment versus Speculation) assuming the reader has sufficient background on Ben Graham's work, in order to focus on the more specific and practical advice from the book.
So here we go, the first of a series of posts as Pilifinance reads The Intelligent Investor.
Chapter 2: The Investor and Inflation
> Stocks should carry more protection against inflation than bonds, but it is not guaranteed.
[Depending on future stock performance (price and dividend) and bond interest income versus inflation.]
> There is no close connection between inflation and stocks (prices and earnings).
In the past, good business was accompanied by inflation, and poor business by deflation, but the effect of inflation on earnings is limited. Correlating the inflation and stock prices will only confuse the investor.
> Do not put your eggs in one basket because of the uncertainty of the future. The conservative investor should minimize his risks but must insure himself from large scale inflation. He can do this by having stocks in his portfolio which is the lesser of two evils, the greater evil being an all bond portfolio.
> Alternatives to common stock as hedge for inflation:
A) Gold - has no cashflow, incurs expenses for storage; earning interest on a savings bank is much better.
B) Things - paintings, stamps, coins have an artificial, unreal, precarious element on the quoted prices; hard to think of as an "investment operation."
C) Real Estate - better amount of protection against inflation but also subject to fluctuations, and errors in the purchase.
Other topics brushed upon:
Return (earnings) on equity is around 10%.
Return (earnings) on market price is usually lower, expressed in the reverse as "times earnings" or P/E ratio.
As a return on stocks, investor may assume dividend return (%) plus increase in book value (%).
Commentary by Jason Zweig
From 1926 to 2002, stocks have outpaced inflation 78% of the time. But it also means stocks failed about 1/5 of the time.
Alternatives to stocks as hedges from inflation include REITs (Real Estate Investment Trusts) as well as TIPS (Treasury Inflation Protected Securities).
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