The Hindu Business Line : Are stocks really a reliable inflation hedge?

The situation we currently face is of a magnitude comparable to the Great Depression and the next worst bear market, the stagflation period of the 1970s, says Peter D. Schiff in The Little Book of Bull Moves in Bear Markets: How to Keep your Portfolio up when the Market is Down ( www.wiley.com ).

“In any event, the investment experience of the 1980s and 1990s, which is the only experience many readers have and which they remember as a time of prosperity and optimism, was poor preparation for what’s ahead,” he adds.

The author observes that stocks are widely believed to provide inflation protection, since

factories, equipment, and inventories rise in value as

prices generally increase.

“Historically, stocks have in fact tended to rise with inflation rates, but too much inflation has caused volatility and raised a question as to whether stocks really are a reliable inflation hedge.”

With the dollar facing imminent collapse, and with foreign central banks printing their own currencies to buy dollars in politically motivated yet economically misguided attempts to manage its decline, people are responding by buying gold, Schiff finds.

“When purchasing power erodes to the point where fear starts giving way to panic, the price of gold will acquire a monetary premium, an increase in price on top of what it gains as an inflation hedge, anticipating the surge in demand that would result if gold were reinstituted as money,” he predicts.

Recommended read.

Long-Term lessons

Alan Greenspan’s serious and long-running error was to consistently shrug off the need for regulation and better disclosure with regard to derivative products, rues Roger Lowenstein in When Genius Failed: The Rise and Fall of Long-Term Capital Management ( www.landmarkonthenet.com ).

If the Long-Term episode proved anything, it is that the system

of disclosure that has worked so

well with regard to traditional securities has not been able to do

the job with respect to derivative contracts, the author reasons.

“Investors have a pretty good idea about balance-sheet risks; they are completely befuddled with regard to derivative risks.”

Apart from improving reporting

on derivatives, there is a strong case for restricting actual exposure,

argues Lowenstein.

Long-Term’s saga of

riches to rags was

replete with lessons for investors, he says.

“Even when traders get things ‘right,’ markets can hardly be expected to oscillate with the precision of sine waves… Unlike dice, markets are subject not merely to risk, an arithmetic concept, but also to the broader uncertainty that shadows the future generally.”

According to Lowenstein, the LTCM episode proved that eggs in separate baskets can break simultaneously. “Moreover, Long-Term fooled itself into thinking it had diversified in substance when, in fact, it had done so only in form.”

The next time a computer with a perfect memory of the past is said

to quantify risks of the future,

investors should run, and quickly,

the other way, suggests Lowenstein.

Imperative addition to the investment historians’ shelf.

Walk it out

Want to solve a problem? Go for long walks, advises Tony Buzan in The Power of Creative Intelligence: 10 Ways to Tap into your Creative Genius ( www.thorsons.com ). The Romans had a special phrase, solvitas perambulum, which can be roughly translated as ‘solve it while you walk,’ he narrates.

“What they had realised, although obviously not in left/right brain terms, was that if you take your brain for a walk, especially outside in the country, the steady rhythm of your limbs’ movement, the regular rhythm of your heart pumping more strongly, doses of oxygen-filled blood flowing into your brain, and the feast your eyes, ears and other senses have while you walk, all contribute to creative thinking and problem solving.” Therefore, walk it out

and you’ll work it out, assures Buzan.

Healthy material.

The knowing-doing gap
t is not always that we apply things we know. To bridge the gap between knowing and doing, you must begin by understanding the source of this gap, says Jeffrey Pfeffer in one of the essays included in Executing for Results ( www.tatamcgrawhill.com).
For instance, find out if the gap comes from an absence of courage or from measurement systems that measure the wrong things, he guides. “Whether the gap comes from an emphasis on planning, analysis, and talking rather than doing; or whether the gap comes from the fact that people are so afraid in your organisation that they’re afraid to do what they know is the right thing, because they’re afraid of getting fired…”
In cases where you find that people are too engaged in talking and planning rather than doing, you need to emphasise the organisational equivalent of rapid prototyping, Pfeffer counsels.
Insightful study.

BookPeek.blogspot.com
D. Murali

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