The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [271]
* See p. 25.
* John Pierpont Morgan was the most powerful financier of the late nineteenth and early twentieth centuries. Because of his vast influence, he was constantly asked what the stock market would do next. Morgan developed a mercifully short and unfailingly accurate answer: “It will fluctuate.” See Jean Strouse, Morgan: American Financier (Random House, 1999), p. 11.
* The investment philosopher Peter L. Bernstein feels that Graham was “dead wrong” about precious metals, particularly gold, which (at least in the years after Graham wrote this chapter) has shown a robust ability to out-pace inflation. Financial adviser William Bernstein agrees, pointing out that a tiny allocation to a precious-metals fund (say, 2% of your total assets) is too small to hurt your overall returns when gold does poorly. But, when gold does well, its returns are often so spectacular—sometimes exceeding 100% in a year—that it can, all by itself, set an otherwise lackluster portfolio glittering. However, the intelligent investor avoids investing in gold directly, with its high storage and insurance costs; instead, seek out a well-diversified mutual fund specializing in the stocks of precious-metal companies and charging below 1% in annual expenses. Limit your stake to 2% of your total financial assets (or perhaps 5% if you are over the age of 65).
1 The U.S. Bureau of Labor Statistics, which calculates the Consumer Price Index that measures inflation, maintains a comprehensive and helpful website at www.bls.gov/cpi/home.htm.
2 For a lively discussion of the “inflation is dead” scenario, see www.pbs. org/newshour/bb/economy/july-dec97/inflation_12-16.html. In 1996, the Boskin Commission, a group of economists asked by the government to investigate whether the official rate of inflation is accurate, estimated that it has been overstated, often by nearly two percentage points per year. For the commission’s report, see www.ssa.gov/history/reports/boskinrpt.html. Many investment experts now feel that deflation, or falling prices, is an even greater threat than inflation; the best way to hedge against that risk is by including bonds as a permanent component of your portfolio. (See the commentary on Chapter 4.)
3 For more insights into this behavioral pitfall, see Eldar Shafir, Peter Diamond, and Amos Tversky, “Money Illusion,” in Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames (Cambridge University Press,2000), pp. 335–355.
4 That year, President Jimmy Carter gave his famous “malaise” speech, in which he warned of “a crisis in confidence” that “strikes at the very heart and soul and spirit of our national will” and “threatens to destroy the social and the political fabric of America.”
5 See Stanley Fischer, Ratna Sahay, and Carlos A. Vegh, “Modern Hyper- and High Inflations,” National Bureau of Economic Research, Working Paper 8930, at www.nber.org/papers/w8930.
6 In fact, the United States has had two periods of hyperinflation. During the American Revolution, prices roughly tripled every year from 1777 through 1779, with a pound of butter costing $12 and a barrel of flour fetching nearly $1,600 in Revolutionary Massachusetts. During the Civil War, inflation raged at annual rates of 29% (in the North) and nearly 200% (in the Confederacy). As recently as 1946, inflation hit 18.1% in the United States.
7 I am indebted to Laurence Siegel of the Ford Foundation for this cynical, but accurate, insight. Conversely, in a time of deflation (or steadily falling prices) it’s more advantageous to be a lender than a borrower—which is why most investors should keep at least a small portion of their assets in bonds, as a form of insurance against deflating prices.
8 When inflation is negative, it is technically termed “deflation.” Regularly falling prices may