Monday, 11 February 2008

Aternative to Common stocks as inflation Hedges---Benjamin Graham

Book: The Intelligent Investor
Author : Bejamin Graham
Edition: 1971-72

Chapter 2 The Investor and Inflation

"Alternatives to common stocks as inflation hedges

The standard policy of people all over the world who mistrust their currency has been to buy and hold gold. This has been against the law for American citizens since 1935---luckily for them. In the past 35 years the price of gold in the open market has advanced from $35 perounce to $ 48 in early 1972-- arise of only 35%. But during all this time the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money in a savings bank, inspite of the rise in the general price level.

The near-complete failure of gold to protect against a loss in the purchaing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in "things". Quite a few categories of valuable objects have had striking advances in market value over the years-- such as diamonds,paintings by masters, first editions of books, rare stamps and coins, etc. But in many, perhaps most, of these cases there seems to be an element of the artificial or the precarious or even the unreal about the quoted prices. Somwhow it is hard to think of paying $67,500 for a U.S. silver dollar dated 1804 (but not even minted that year) as an "investment operation." We acknowledge we are out of our depth in this area. Very few of our readers will find the swimming safe and easy there.

The outright ownership of real estate has long been considered as a sound long term investment, carrying with it a goodly amount of protection against inflation. Unfortunately, real-estate values are also subject to wide fluctuations; serious errors can be made in location, price paid, etc.; there are pitfalls in salesmen's wiles. Finally, diversification is not practical for the investor of moderate means, except by various types of participations with others and with the special hazards that attach to new flotations--- not too different from common-stock ownership. This too is not our field. All we should say to the investor is, "Be sure it's yours before you go into it." "

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