Are stocks an inflation hedge?


By uomo_senza_nome   Follow   Thu, 13 Dec 2012, 8:50am   1,211 views   17 comments
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http://twocents.blogs.com/weblog/2012/12/are-stocks-an-inflation-hedge.html

To a certain extent. As long as inflation isn't runaway.

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  1. errc


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    1   9:06am Thu 13 Dec 2012   Share   Quote   Permalink   Like (3)   Dislike (1)  

    The only way to hedge against inflation is to take on as much debt as humanly possible

    Stocks for the most part are no different than any other form of gambling. I actually prefer sports handicapping myself, its a much more transparent and honest marketplace. Shame that the United States of Shiitmerica fed gov forces us onto the black market though, that makes it more risky.

    It all boils down to your timing an entry point and an exit plan. Look at two of the most usfedgov cronyism influenced stocks, WFC and AIG. From thanksgiving lats year to labor day this year, both stocks stepped their way up to 50+% gains. Fuck all if there's any sound reasoning for that

  2. AverageBear


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    2   12:25pm Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    I've read that tons of money is in bonds, and that equities are woefully underbought, in historical terms..... As a dividend growth investor (DGI), I buy and hold stocks that increase their dividends. These companies raise their dividends faster than inflation. By DRIPPING these divvvies back into the companies, I hope to increase my yield on cost. As a DGI guy, I actually welcome small and medium term drops in these stocks; these represent more buying opportunities. It's all about dividend income stream. The goal is to have this stream meet or exceed my costs of living when I retire. I'm basically trying to create a money-machine, hoping to never 'break off parts of the machine' while in retirement, and live off the increasing dividends it churns out. Finding these companies is like shooting fish in a barrel (KO, MCD, PM, DEO, PG, JNJ, INTC, AFL)....It's the conviction to stick to the plan, and actually saving that's the hard part... Timing and entry into these stocks is very important as well. Buy what's on sale. NEVER sell unless a company stops growing the dividend, cuts the dividend, or stops the dividend altogether..... Simple to understand, yet takes balls of brass to follow through on. I've been doing this for 2 years, and although a boring way to invest, has me impressed....

  3. GraooGra


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    3   3:27pm Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    errc says

    The only way to hedge against inflation is to take on as much debt as humanly possible

    Only if your loan is long-term fixed rate. Most loans have variable rates and they adjust to the inflation. Unless you think to borrow money from your relatives with no interest.

  4. vlad2


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    4   4:11pm Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    >>I've read that tons of money is in bonds, and that equities are >>woefully underbought, in historical terms.....

    I think these concepts of "equities being under bought", "cash on a side lines", etc are just myths.

    1. each stock is owned by somebody, when you sell someone else buys
    2. cash does not despair from so called side lines, it's just transferred from one holder to another

  5. vlad2


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    5   4:16pm Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    and errc is right, just get as much debt as possible IF YOU THINK inflation is coming big time

  6. vlad


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    6   4:21pm Fri 14 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    >>I've read that tons of money is in bonds, and that equities are >>woefully underbought, in historical terms.....

    I think these concepts of "equities being under bought", "cash on a side lines", etc are just myths.

    1. each stock is owned by somebody, when you sell someone else buys
    2. cash does not despair from so called side lines, it's just transferred from one holder to another

  7. Peter P


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    7   8:29pm Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected  

    I think stocks is a good hedge against hyperinflation.

  8. just_passing_through


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    8   11:06pm Fri 14 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    I'm curious what you all might think of CDs. Not right now obviously but if we get a hyper-inflation might rates become attractive? I am a bit naive about this but had pondered the possibility. My grandmother who would be 105 right now once told me she'd made 17% on some CDs. I have no idea when that might have been. She also told me to buy gold about 7 or 10 years ago. Still very sharp at 101 when she passed.

  9. uomo_senza_nome


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    9   3:36pm Sat 15 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    errc says

    The only way to hedge against inflation is to take on as much debt as humanly possible

    True, but a one way bet towards inflation is not very wise IMHO. Hedging for different outcomes is a better way to go.

  10. uomo_senza_nome


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    10   3:37pm Sat 15 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    AverageBear,

    can you give some examples based on your past experience? do you prefer buying individual stocks or funds?

  11. uomo_senza_nome


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    11   3:55pm Sat 15 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Peter P says

    I think stocks is a good hedge against hyperinflation.

    I highly recommend this podcast interview of Eric Janszen where he explains the difference between high inflation and hyperinflation.

    http://www.financialsense.com/node/8504

    Hyperinflation is characterized by the following:

    * complete collapse of confidence of all economic actors
    * complete productive output loss (widespread bankruptcies, capital destruction etc.)
    * complete loss of faith in political class
    * severe shortage of necessities (food, oil etc.)

    All these are classic characteristics of deflation as well. Deflation is a twin of hyperinflation, the nature of fear being the primary difference.

    In deflation, the fear is about running out of dollars.
    In Hyperinflation, the fear is about dollars becoming worthless.

    Stocks are not a good hedge in either extremes of fear.

  12. Peter P


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    12   4:01pm Sat 15 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike (1)   Protected  

    I guess you are right. So productive land financed with fixed-rate debt is one of the few inflation hedges available, provided that the rule of law still applies.

  13. AverageBear


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    13   6:21pm Sat 15 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    uomo_senza_nome says

    AverageBear,


    can you give some examples based on your past experience? do you prefer buying individual stocks or funds?

    --------
    Uomo,

    Honestly, I'm only 2 years in, being a DGI investor. I started my interest in investing around 2004. I listened to Kramer, and got burned by that loser(think Sears Holding, Eddie Lampert, blablabla). Then I discovered Motley Fool. I read everything(the free articles; never paid for any of their subscriptions), and got the idea of dividend investing from that site. I found their articles interesting, but more full of 'fluff'. I got burned a little w/ a Chinese company, Primo Water...I then discovered Seeking Alpha, and haven't looked back.

    To answer your question, I buy individual stocks. I originally held higher dividend paying stocks(NYB, MO), but realized the middle-divvy stocks w/ the big dividend growth is where it's at. That's not a hard rule, but it makes the majority of my investments. I started back in '09, taking over a long forgotten 401K. I invested in GLD and SLV, and got a 50% return. I slowly scaled out of that into the following: KMR, T, ROIC, CVX, PM, VOD, JNJ, KO, INTC, MCD, AFL.. This is about 70% of my portfolio. I'm not afraid of investing in these individual stocks. Why? They are best of breed, have been around forever, and if Goldman Sachs keeps these stocks, to me, that says enough. The rest is in 'riskier' assets w/ higher reward: SAND (currently up 110%), SLV, ABHD and SZYM... Maybe I'm oversimplifying, but I'm hoping for some event for gold and silver to spike. If the dividend stocks fall, I'll buy them w the proceeds from the selling of SAND/SLW. But if no 'big event' happens, I'll scale out of gold, probably keep some SLW, and march on w/ the growing dividend stream....I'm a believer of buy/holding of dividend stocks. My Mom worked for ATT back in the 50's/early 60's. her stocks/divvies/DRIPPING created her 'money machine' that put me and my two older sisters through private HS (not boarding), and 4 years of college. All while not touching principle at all. She still holds "T", and loves getting those quarterly 'kisses' in the mail...I've got 25 years left before I retire, and glad I finally figured this out. Eventually, I'll diversify some into ETFs/bonds and maybe funds, but for now, I'm happy eliminating the 'middle man', and most importantly, keeping the growing dividends...Why would I give funds my $$ (in the form of fees), while they get to keep the increasing yield on cost of these dividend stocks? To me, that's the secret.....I dunno, maybe I'm an oversimplifying putz.....I sleep well at night, knowing if the market crashes, I'll be fine.... Sorry for the long-winded answer. I enjoy telling my story...

  14. AverageBear


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    14   6:26pm Sat 15 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    AverageBear says

    SLV

    --------
    Meant to say SLW. I was in SLV, but got scared of the 'paper' silver, and discovered the 'Streaming' business model, and went into SLW/SAND (when it was SNDXF.PK)...

  15. uomo_senza_nome


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    15   11:04am Sun 16 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    AverageBear,

    Thanks. But wouldn't buying individual stocks cost commissions everytime you engage in a transaction?

    Isn't a mutual fund better in that case? Such as say for example VWELX.

    Which contains the stocks you mentioned and 33% in bonds as well, has been around since 1929.

    I suppose if you time it well, then the commissions won't hurt you in the long run. But it's hard to get that right, when that is not your full time job :)

  16. uomo_senza_nome


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    16   8:32am Mon 17 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    just_passing_through says

    She also told me to buy gold about 7 or 10 years ago. Still very sharp at 101 when she passed.

    That's brilliant advice.

    E-man says

    You can argue it's an inflation hedge

    I don't think you can argue that gold is an inflation hedge. I think the best argument for gold is that it is an uncertainty hedge.

    See this: http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/

    I would say gold is anti-correlated to real interest rates and gold is like a super-treasury bond with long-term wealth preservation characteristics.

    just_passing_through says

    Not right now obviously but if we get a hyper-inflation might rates become attractive?

    I don't think so. CDs are really just Treasury investments that the bank will take care for you. You may as well park that money in short-term T-bills or bonds and get the same yield without any early withdrawal penalty. And hyperinflation is a totally different beast, than high inflation, as already explained.

    E-man says

    At this point, I'm afraid we have passed the peak in gold price. If history is any indication, gold will likely go sideways then gradually decline for the next 10-15 years.

    obviously you have a bright outlook for our economy in the future :). Let's hope that's how it actually turns out.

  17. AverageBear


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    17   3:30pm Mon 17 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    uomo_senza_nome says

    Thanks. But wouldn't buying individual stocks cost commissions everytime you engage in a transaction?
    Isn't a mutual fund better in that case? Such as say for example VWELX.
    Which contains the stocks you mentioned and 33% in bonds as well, has been around since 1929.

    --------------------------------------
    Although VWELX sports a 2.77 yield, does this yield increase? I'm not trying to sound like a jerk, I just don't know. Do they bump up the payout per year like the dividend stocks like AFL, KO, MCD? Some of these stocks increase their dividends on average from 10 to 25% per year. I don't think VWELX does this. Again, this is the inflation hedge. If you invest in PG, and costs go up, who do you think is gonna pay more at Sam's Club or BJ's or Walmart for the higher cost of that laundry detergent? Yep, the consumer. That moola winds up in your quarterly dividend that WILL increase faster than inflation. As for my trading costs, I've been doing about 15-20 transactions per year. THis will come down though, since i've got my stock picks finally sorted out over the last two years. So these transaction costs will be $120 - $150 a year, whether my porfolio is 10K, 100K, or 10 million. DRIPPING (reinvesting dividends into more shares) doesn't cost anything. All of these are in my 401K and Roth IRA, so the compounding increases even more w/o any taxes to worry about. What are VWELX's costs?

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