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Source link: http://archive.mises.org/11723/inflation-as-the-enemy-of-investing/

Inflation as the Enemy of Investing

February 24, 2010 by

For those who are interested in accumulating wealth and willing to put the time and hard work toward that end, Joseph Calandro Jr. has masterfully melded the work of Graham and Dodd with Austrian business-cycle theory. FULL ARTICLE by Doug French


fundamentalist February 24, 2010 at 10:37 am

I just finished the book and thought it was OK. I don’t think individual investors should be analyzing specific companies unless they’re in an investment club where each member can focus on one company. Analyzing individual companies takes a lot of work and most people don’t have the time. I think most people would be better off choosing industries to invest in via ETF’s.

In addition, there is only one time in the business cycle when most stocks are undervalued and that’s during the bust. Once the recovery begins, few stocks will be value plays, unless they are in serious distress.

And I didn’t care for Soros’ “reflexivity” model. I’m not even confident it is accurate. I think Hayek’s business cycle, especially the Ricardo Effect, provides a much better way of timing entry and exit into the stock market, but also into commodities, which every investor should consider.

Sag February 24, 2010 at 12:49 pm

Doug French,

Great article. The book seems like a worthwhile read. I’ll pick it up. Thanks.

Miles Hoffman, CFA (aka MILESCFA) February 24, 2010 at 2:26 pm

“Austrian business-cycle theory can give investors ideas on when to invest and what to invest in, but the Austrian School provides little in the way of analyzing specific companies and stock prices….”

Ok… but who says you have to be able to pick stocks? Most professional money managers underperform the S&P500 index, so if the professional can’t pick stocks, why should you need to be able to do so?

If you understand the boom/bust nature of the business cycle, then you’re halfway to understanding the concept of “Secular Bull and Bear Markets”. Ed Easterling of CrestmontResearch.com literally “wrote the book” on this topic (Unexpected Returns) and I’ve written a blog (http://mileshoffman.blogspot.com/2009/11/whats-your-decade-man.html) that is, to some degree, an abstract of his book. If you understand my blog, then you’ll understand “Austrian investing”.

Understanding “the when” is SO much more important than understanding “the which”.

greg February 24, 2010 at 4:49 pm

You can value invest until the cows come home and come up short.

To be sucessful in investing you must come to grips with the reality that the market is manipulated by a few and information is leaked through inside information, real or not. What you need to watch is the option trades to get a slight heads up on the direction a stock is going to move.

Use options to buy and sell stocks. By selling puts and calls, you can generate income while buying or selling stocks at your target prices.

Anonymous February 24, 2010 at 6:12 pm

Austrians have a competitive advantage in currency investing, including gold and silver! Jim Rogers suggested that every investor learn about trading currencies in 2010.

Please don’t take Greg’s advice. Selling put and call options is very risky. Selling call options exposes the investor to unlimited downside with little upside potential. Don’t sell options unless you really know your stuff: huge downside and small upside with lots of volatility is a recipe for disaster.

I think buying call options on gold, silver, or a strong currency could be a good catastrophe hedge. Buying puts on U.S. Treasuries is another one.

Money Manager February 24, 2010 at 7:12 pm

“Most professional money managers underperform the S&P500 index”

I would expect them to. If everyone beats it, who are they beating?

Money Manager February 24, 2010 at 7:14 pm

That doesn’t mean it’s a zero-sum game. But there will always be half that underperforms the median.

Dave Doctor February 24, 2010 at 8:39 pm

I use Harry Browne’s Permanent Portfolio philosophy to not necessarily beat inflation, just not get destroyed by it and other government interference in the economy.

Pete February 24, 2010 at 9:25 pm

“The typical stockbroker went from selling shoes or cars to hustling stocks after passing the Series 7 exam. Your financial future is not his or her concern; generating sales commissions is. Of course there is plenty of free advice out there, from Jim Cramer to Suze Orman. But, you will likely get what you pay for. Finding good investments is very hard work. Buying them at the right price is even harder work. Having the patience to buy at the right time and sell at the right time is nearly impossible.”

Find a good stockbroker. While it is true that most stockbrokers, financial advisors, and financial planners are worthless, you probably wouldn’t read a book to fix your car or build your house. The time spent reading this book could be spent finding a good stockbroker. They have the same incentive anyone has to do a good job. Oddly enough, some people do a good job of things. If you are smart enough to invest for yourself, you are probably smart enough to realize the benefits of division of labor. Buying and selling at the right time is a full time job (even trying to do it is).

That said, Calandro’s book is on my Amazon wishlist and is probably a worthy read.

pro_IP_libertarian February 25, 2010 at 7:06 am

Good article. I’ll definitely be adding the book to my reading list.

One quibble though:

It is an especially cruel result of inflation that instead of simply being able to hoard money, people must “invest their money into the financial markets, lest its purchasing power evaporate under their noses,” explains Jörg Guido Hülsmann in The Ethics of Money Production. “Thus they become dependent on intermediaries and on the vagaries of stock and bond pricing.”

The stock, bond, and real estate markets would still be crucial even in a world of no inflation. One can only work so many hours in a week. So aside from some very high-wage workers the vast majority relies on putting their capital to work to raise their standard of living, become upwardly mobile, build wealth, etc. Inflation just makes it that much harder since one can’t go to the low risk default of the highest investment grade bonds (risk-free rate) because inflation usually eats most or all of this return up. Same for a lot of the other simple, low risk default choices.

In fact it’s one of the biggest travesties of poor worldwide economic education that many of those that claim to be concerned with things like poverty, upward mobility, increases in living standards, etc. (mainly socialists, collectivists, social democrats, etc.) are against stock, bond, and real estate markets when they are really the only effective way for hardworking people to lift themselves out of poverty and beyond. Taxes (and spending) need to be cut across the board to increase the health and growth of economies and increase employment, decrease poverty, etc. But one area that should certainly be first in line is taxes on interest income, dividend income, rental income, and capital gains for middle class and lower people. It’s one of the basic ways for people to become upwardly mobile and the government is smothering it because they think they are taxing the “wealthy”. (Not that targetting the actually wealthy for high taxation is a smart or effective idea either.)

gene February 26, 2010 at 2:18 pm

capital is the product of production. labor is the foundation of production.

if you can devise a method to get capital out of the hands of those who produced it and into the hands of those who produce nothing, you have created [or sustained] an elite class.

inflation is one way to do that. inflation devalues past and present production and values [by default] speculation, usually on the foundation of fear of more inflation.

pro_IP_libertarian February 26, 2010 at 7:40 pm


if you can devise a method to get capital out of the hands of those who produced it and into the hands of those who produce nothing, you have created [or sustained] an elite class.

This seems to assume that investors/speculators produce nothing. (I’m lumping speculators and investors together because different people draw the line dividing them in different places.) That is not the case. By providing the capital for capital formation – and putting this capital at risk – they enable labor to be employed more efficiently and productively.
Unless the average worker has a factory in their pocket it is very difficult to engage in long term or large scale production without the capital formation provided by investors/speculators. Modern economies – basically most of civilization – is built on capital investment.

However, with stock, bond, and real estate markets it has never been more democratic to invest/speculate. Almost any individual can gather enough capital together for stock, bond, or real estate ownership. So modern stock, bond, and real estate markets have never been as non-elitist as they are today. The individual just has to be careful to do their research so that they or their advisors are investing/speculating intelligently. (Intelligent, informed, business-like investing is pretty far removed from speculation.)

inflation is one way to do that. inflation devalues past and present production and values [by default] speculation, usually on the foundation of fear of more inflation.

Inflation is bad for a number of reasons, including the increased need for higher yield investment/speculation to overcome the loss of currency buying power. Without inflation things would be easier because low-risk, default choices would be more effective. So doing away with or reducing inflation as much as possible is very important. But doing away with stock, bond, and real estate markets – and the property rights that support them – would be nightmarishly damaging society.

pro_IP_libertarian February 26, 2010 at 7:43 pm

Correction, last sentence above should read:

“…would be nightmarishly damaging to society.”

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