investors and inflation

 By the late 1990s this advice—which might actually be appropriate for a foundation or financial endowment, since these are able to invest unlimitedly and for long periods of time—had spread to individual investors, whose life horizons are limited. In the 1994 edition of his influential book Stocks for the Long Run, Wharton School finance professor Jeremy Siegel suggested that 'risk-taking' investors should buy on margin. They should borrow more than one-third of their net worth and put 135% of their capital into stocks. Even government officials got in on the act. In February 1999, the Honorable Richard Dixon, Maryland's state treasurer, told an audience at an investment conference, "It makes no sense for anybody to have money in a bond fund.

"This was one of the rare occasions when Graham predicted wrong. In 1973, two years after President Richard Nixon imposed wage and price controls, inflation hit 8.7 percent. It was the highest inflation rate since the end of World War II. The period from 1973 to 1982 was the most inflationary in U.S. history. The cost of living more than doubled during that period.

John Pierpot Morgan was the most powerful financier of the late nineteenth and early twentieth centuries. Because of his enormous influence, he was often asked what would happen next in the stock market. Morgan had a short and to the point answer ready: "It will go up and down." See Jean Strauss, Morgan American Financier (Radam Bausch, 1999), p. 11.Investment philosopher Peter L. Bernstein believes Graham was 'blatantly wrong' about precious metals, especially gold. These metals have shown strong inflation-beating potential (at least in the years after Graham wrote this chapter). He points out that even if gold performs poorly, a small allocation to a precious metals fund (say 2 percent of your total assets) is unlikely to hurt your overall return. But when gold performs well, its returns are often spectacular -...It can sometimes return more than 100 percent in an entire year—and make a lackluster portfolio shine on its own, but a smart investor avoids investing directly in gold because of its high storage and insurance costs. Instead, he looks for a mutual fund that has a diversified portfolio, specializes in stocks of companies that deal in precious metals, and charges less than 1 percent in annual expenses. Limit your holdings to 2 percent of your total financial assets (or perhaps 5 percent if you're over 65).