Inflation


I

Ignoramus1214

My personal opinion is that we'll see inflation increasing, possibly
to 15-20% per year, going on for a few years.

I do not really want to argue about it and want you to assume for a
minute that it is true and think under this assumption.

The question is financial planning. I am just a regular 37 year old
married guy with a house, over 50% paid off, savings,401k, IRA
etc. About 30% of my net worth is in Berkshire Hathaway stock, 25% in
the house, 30% in 401ks, the rest in some cash and Euro denominated
bank accounts. About 1 million net worth (which is not a big deal any
more). Nothing special.

What I DO NOT want to happen is lose a substantial chunk of what I
have, and worked for, due to inflation. I am OK with some volatility,
possibility of losing 20% due to volatility, etc. But what I do not
want to do is "lose everything" or "almost everything".

So I want to reposition my assets such that if considerable inflation
occurs, I would not lose too much. Things such as money market
accounts, and so on, are obviously not the answer. There are some
reality constraints, such as 401k limited to my [very lousy] set of
choices.

My question is what sorts of investments, would, more or less,
compensate the owner for inflation. I tend to lean, as a matter of
reality, towards keeping my Berkshire stock, buying a little more
Euros, moving some of my 401k plan money to the "international fund".

One possibility that I am considering is buying a couple of apartments
to rent out, but I am a little put off by the hassle factor.

Has anyone put any serious thought into inflation proofing themselves?

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J

John A. Weeks III

Ignoramus1214 said:
My personal opinion is that we'll see inflation increasing, possibly
to 15-20% per year, going on for a few years.
One possibility that I am considering is buying a couple of apartments
to rent out, but I am a little put off by the hassle factor.
The problem I see there is that where I live, in the Twin Cities,
rents are so low and property costs so much that you cannot justify
making the investment. I use the rule of thumb that rent has to
be 1% of the purchase price each month to break even. So, on a
$50,000 unit, you need to get $500 a month. Most bottom end
rentals are in the $80,000 per unit range, but rents for them
are stuck in the $750 a month range. I cannot see doing all the
work and taking the risks just for break-even. You could simply
put the money into a CD and at least make a small profit.
Has anyone put any serious thought into inflation proofing themselves?
I am far more worried about jobs and health insurance. I am
out of the health care system since my industry have moved to
the independent contractor model, and I have pre-existing
conditions that makes a personal health plan cost-prohibitive.
As long as the job shortage stays high or grows, people will
not have the excess money to buy much, and that should keep
inflation down over the long haul.

I have noticed that the things that I tend to buy have gone
up in price significantly over the past few years, much more
than what the CPI numbers would suggest.

-john-

--
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D

Dave Dodson

My question is what sorts of investments, would, more or less,
compensate the owner for inflation.

Has anyone put any serious thought into inflation proofing themselves?
TIPS would provide the protection you want.
   Due to extreme spam originating from Google Groups, and their inattention
      to spammers, I and many others block all articles originating
       from Google Groups. If you want your postings to be seen by
         more readers you will need to find a different means of
                       posting on Usenet.
                   http://improve-usenet.org/
There is no reason to block Google Groups content in moderated
newsgroups like this one.

Dave

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D

Douglas Johnson

Ignoramus1214 said:
My personal opinion is that we'll see inflation increasing, possibly
to 15-20% per year, going on for a few years.

My question is what sorts of investments, would, more or less,
compensate the owner for inflation. I tend to lean, as a matter of
reality, towards keeping my Berkshire stock, buying a little more
Euros, moving some of my 401k plan money to the "international fund".
Having lived through the 70's, I can relate some experience. First, cash is
trash. It is worth less every minute. Of course, you need some for everyday
uses and emergencies, but that's not investment.

You want to own tangible things. Real estate is classic, but as John pointed
out, it has its own problems right now. My metric for real estate investment is
that it must have positive cash flow, including vacancy allowances, maintenance,
etc. Another advantage of real estate is it can be highly leveraged at low
interest rates. In high inflation environments, you want to be a debtor if your
interest rates are lower than inflation. This would call for refinancing your
residence at the highest loan to value that you can get.

You want to buy in bulk for staples.. This is one of easiest investments in a
high inflation environment.

International investments are interesting only if you believe inflation will be
localized to the US, i.e. caused by the Fed printing too much money while other
central banks don't.

Commodities are almost always volatile, but at least in theory, are tangible
things that will rise in price more-or-less in line with inflation. TIPS have
been suggested, but have the downside that you get to pay taxes on your
inflation return, which likely results in a net loss in nominal value.

Stocks should be chosen very carefully. The companies must have pricing power
and limited exposure to inflation in what they consume.
Has anyone put any serious thought into inflation proofing themselves?
Having said all of the above, I think we're near peak for inflation. Deflation
is more likely. The argument goes something like this:

Inflation is caused by too much money chasing too few goods and services. The
current deleveraging of the economy is removing money very rapidly. Therefore
we will have less money chasing goods and services, not more.

Unlike the 70's, the Fed understands the first point very well. I think they
are more than willing to raise interest rates to keep inflation in check. We
are already hearing that from at least one voting member of the open market
committee (Richard Fisher). See:
http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-FisherQA_17bus.ART.State.Edition1.4d80510.html

They can get it wrong of course, but I think 15%-20% inflation for a number of
years is unlikely in the extreme. But I've been wrong before and will be again.

-- Doug

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T

Tad Borek

Ignoramus1214 said:
My personal opinion is that we'll see inflation increasing, possibly
to 15-20% per year, going on for a few years.

The question is financial planning. I am just a regular 37 year old
married guy with a house, over 50% paid off, savings,401k, IRA
etc. About 30% of my net worth is in Berkshire Hathaway stock, 25% in
the house, 30% in 401ks, the rest in some cash and Euro denominated
bank accounts. About 1 million net worth (which is not a big deal any
more). Nothing special.

I have to ask, why do you think $1M@37 is "nothing special"? I'm working
on a project aimed at savers/investors your age and that issue is coming
up - highly inflated ideas about how much wealth is out there. What
makes you believe it's not a big deal/nothing special? (I believe today
that would be in 98th or higher percentile for 37 year olds).

Regarding inflation - your thesis is somewhat extreme, predicting
inflation rates much higher than those suggested by current market
indicators. I'm not going to try to talk you out of that, but would
challenge it: why 15-20%? You probably have some specific reasons why
you think inflation will be that high. And they could point at methods
of hedging that risk. For example if it's based on $200/bbl oil then
that could be your focus...seeking to profit from $200/bbl oil while
avoiding investments in the companies (including oil-industry companies)
that would be hurt by it.

-Tad

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D

dapperdobbs

On Aug 21, 8:58 am, Ignoramus1214 <ignoramus1...@NOSPAM.1214.invalid>
wrote:
[snip]
Has anyone put any serious thought into inflation proofing themselves?
We all wish we knew of an investment that will return better than
15-20% annualized :) With sound planning, you might expect 6-8%. With
superior investment planning, 10 -12% is achievable. If you do your
own well-educated and well executed stock selection, you may reach the
15-20% range. Berkshire is famous for its returns well above, but even
Buffett has advised shareholders not to expect the same in the future.
Otherwise, your positioning and thought seems quite sound. The stock
market is generally regarded as the best way to beat inflation (second
only to increasing your income through education and diligence :). A
couple of thoughts you may already have considered:

Your tax liability should be factored into your net worth. If you have
children, estate planning may mitigate this e.g. you could plan to
draw income from your appreciated investments without selling them.
Companies with consistent earnings growth are able to increase their
dividends. If you have an alternative to invest (perhaps your 401k)
into dividend funds, you might consider that. Even better, research
some companies on your own, screening for consistent earnings growth
and size, to give you a start. You would want to put some serious work
into it, read some leading texts, and evaluate companies carefully.
With good investments, in 20 years you may find yourself receiving 20%
dividend yield on your original capital invested, plus the
appreciation of the stock. This may be less "hassle" than rental
properties.

With all due respect to your request not to argue, a summary rate of
inflation may not be indicative of your own future demands for
disposable income. IMHO a personalized weighted rate of inflation may
provide a better projection. Regular budgeted expenses such as food,
utilities, insurance, clothing, and so on may not be a major
percentage of your annual budget, but college costs or healthcare
costs are a substantial percentage of an annual budget, and those
costs are known to be increasing at the 15-20% rates you mention.

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P

PeterL

My personal opinion is that we'll see inflation increasing, possibly
to 15-20% per year, going on for a few years.

I do not really want to argue about it and want you to assume for a
minute that it is true and think under this assumption.

The question is financial planning. I am just a regular 37 year old
married guy with a house, over 50% paid off, savings,401k, IRA
etc. About 30% of my net worth is in Berkshire Hathaway stock, 25% in
the house, 30% in 401ks, the rest in some cash and Euro denominated
bank accounts. About 1 million net worth (which is not a big deal any
more). Nothing special.

1 million net worth at 37 is nothing special?

If you expect inflation to be at the 15 to 20% range, you should put
your money in gold. And be sure to invest in a good shotgun and lots
of ammo to protect it.

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E

Elle

About 30% of my net worth is in Berkshire Hathaway stock,
Two cents: Unless one has deep expertise, I think holding
such a large proportion in a single company is unwise. I
suggest holding no more than 5% in any one company or even
sector. Yes to hedge inflation but also improve performance
while reducing risk.
25% in
the house, 30% in 401ks, the rest in some cash and Euro
denominated
bank accounts. About 1 million net worth (which is not a
big deal any
more). Nothing special.

My question is what sorts of investments, would, more or
less,
compensate the owner for inflation[?]
If inflation is fairly uniform across all products and
services, have you considered that company earnings will
also similarly inflate? Company earnings and inflation are
inextricably tied together, after all. Hence I think the
most rational hedge against inflation is a diverse portfolio
of stocks. The one alternative to consider is as Dave
suggested: TIPS. Yale Academic Robert Shiller is a fan of
these. You might google and study what he has to say on
this.

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D

Douglas Johnson

dapperdobbs said:
On Aug 21, 8:58 am, Ignoramus1214 <ignoramus1...@NOSPAM.1214.invalid>
wrote:
[snip]
Has anyone put any serious thought into inflation proofing themselves?
We all wish we knew of an investment that will return better than
15-20% annualized :)
Actually, it is fairly easy when inflation is running high. 3 month T-Bills
peaked at 17.01% in 1981. Inflation was 13.5% in 1980 and 10.35% in 1981.
That's when the Fed had finally decided Milton Freedman was right and turned off
the money taps.

Of course, that ran interest rates through the roof and the economy into the
tank. But it did do its job on inflation. From 10.35% in 1981, it was 6.16% in
1982, 3.22% in 1984, and 4.3% in 1985. See
http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=2

That's one of the reasons I'm not too concerned. The Fed can stop inflation
cold if it wants to.

-- Doug

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R

Ron Peterson

My personal opinion is that we'll see inflation increasing, possibly
to 15-20% per year, going on for a few years.
I think that estimate is very high. Look at 3-4% at most.
Has anyone put any serious thought into inflation proofing themselves?
Sure. I also think that one has to protect their assets from the peak
oil problem where oil will increase in price faster than other
commodities.

Bonds and cash aren't very good protection even if inflation indexed.

I am overweight in energy and alternative energy stocks to guard
against increasing energy prices.

Recently, ETFs have been started to represent the price of
commodities. I have DBC which is a broad mix of commodities. I am not
sure what allocation would be best for commodity ETFs. I am currently
at 2.5%, but don't see 10% as a problem. If you are a gold bug, look
at the GLD ETF. I think that natural gas is underpriced now compared
to oil, so UNO might be a good play.

I sell calls against my stock to insure against small declines in
market price. It works out OK most of the time except when there is a
major swing in price up or down. (Options decline in price at about
half the rate of the underlying stock)

I think that you are too high in Berkshire Hathaway. I think that 10%
allocation is a good upper limit for any stock, but I have a couple
that are above that.

--
Ron

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A

anoop

If inflation is fairly uniform across all products and
services, have you considered that company earnings will
also similarly inflate? Company earnings and inflation are
inextricably tied together, after all. Hence I think the
most rational hedge against inflation is a diverse portfolio
of stocks.
That was not true in the 70s. The stock indexes remained
nearly flat for a decade while inflation was in double digits.
Looks to me like the stock markets do better during periods
of low inflation.

Anoop

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D

dumbstruck

So much analysis becomes flawed by confusing inflation with higher
prices. Higher prices (HEADLINE inflation) may come from higher
average built in costs, which does not necessarily inflate the cost of
an asset you have hitched your financial wagon to.

What you need to seperate out is MONETARY inflation, which is the
arbitrary pulling up of virtually all prices due to overheated demand.
A very crude way to monitor that is CORE inflation, but even that
fails to subtract out some nonmonetary things. This is the corrosive
kind of inflation that needs vigilance by the Fed and by investors:

Inflation is caused by too much money chasing too few goods and services.  The
current deleveraging of the economy is removing money very rapidly.  Therefore
we will have less money chasing goods and services, not more.
Confusing these two as they usually are can give the most evil brew.
For example plumbing codes are raised, or they have to drill ever
deeper for oil... that kind of thing should never be considered as an
inflation adjustment for wages or setting Fed rates because either the
product is upgraded or took more effort to produce. If gov't or union
workers get a wage bump based on non-monetary inflation, this simply
makes the remainder carry everyones(!) burden of increased cost or
benefit, and possibly create monetary inflation.

But for investors I would say there is a key subtype of monetary
inflation - BUBBLE inflation. The world has so much liquidity looking
for a home to pile into, and thus over years, months or even days
everyone piles in and out of oil, gold, real estate, Chinese stocks,
small cap US stocks, etc with little regard to fundamentals. It isn't
overall asset inflation, but is targeted based on transitory fashion
and jumping on bandwagons. Don't overlook that when choosing an asset
entry or exit point.

Of course all these types co-exist, and have to be subtly inferred
apart. Above all, do not confuse monetary inflation with higher prices
you happen to encounter. There should be a law against using the term
inflation without saying what kind...

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E

Elle

anoop said:
That was not true in the 70s. The stock indexes remained
nearly flat for a decade while inflation was in double
digits.
As I wrote above, you need to look at earnings. While the
indices remained fairly flat, earnings rose such that from
1970 to 1979, the P/E ratio for the S&P 500 fell from about
18 to about 7. Stocks became a bargain. If one invested in
stocks properly--that is, for the long run--then one would
have picked up stocks at very low prices during this
period. The triple compounding effect of higher dividends,
purchasing more shares for every buck because shares were
cheap, combined with stock price appreciation, kicked in
massively in the 80s.

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R

Ron Peterson

"Ignoramus1214" wrote
Two cents: Unless one has deep expertise, I think holding
such a large proportion in a single company is unwise. I
suggest holding no more than 5% in any one company or even
sector. Yes to hedge inflation but also improve performance
while reducing risk.
Because Berkshire has such a large capitalization, he should be able
to handle 10-20% allocation. Given his net worth, he probably has 3
shares, so the best he could do is to sell 2 without completely
divesting himself.

--
Ron

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E

Elle

Ron Peterson said:
Because Berkshire has such a large capitalization, he
should be able
to handle 10-20% allocation.
I would not say larger capitalization can justify a larger
allocation. Plenty of large cap companies have had disasters
visit them, driving their share prices down to half or less.
OTOH, if you are saying that BH has diversified so that it
owns many businesses, and so owning a share of BH is like
owning a share of a well-diversified mutual fund, I might
buy this, in part. In my view, BH still has a single board
of directors, and the directors can still make mistakes and
destroy the company.
Given his net worth, he probably has 3
shares, so the best he could do is to sell 2 without
completely
divesting himself.
Aside: Must he necessarily own Class A shares? Class B
shares trade for 1/30th the value of Class As.

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R

Ron Peterson

"Ron Peterson" <r...@shell.core.com> wrote
I would not say larger capitalization can justify a larger
allocation. Plenty of large cap companies have had disasters
visit them, driving their share prices down to half or less.
OTOH, if you are saying that BH has diversified so that it
owns many businesses, and so owning a share of BH is like
owning a share of a well-diversified mutual fund, I might
buy this, in part. In  my view, BH still has a single board
of directors, and the directors can still make mistakes and
destroy the company.
It's the point of market weighted indices to have higher allocation to
corporations with higher market cap.

IIRC, large cap companies are much less likely to fail than small cap
companies.

--
Ron

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E

Elle

It's the point of market weighted indices to have higher
allocation to
corporations with higher market cap.
I cannot parse the above.
IIRC, large cap companies are much less likely to fail
than small cap
companies.
It is true large caps are less likely to fail than small
caps. But their boards do blunder and/or accidents happen
costing them billions of dollars. Consider CSCO (dove 80% or
so over a few years), Enron, MRK (Vioxx), MO (cigarette
litigation), and WM (stupid Board yada overexposing the bank
to subprime mortgages). Could a serious climate disaster
take a huge toll on BH, especially if the Board blundered in
planning? I think so. I say this as a Buffett fan. Yet look
what BH did last summer: It bought BAC at prices around 50,
on the premise that BH likes stable, easy to understand
companies. BAC is now down to about 30 because of its
exposure to subprime loans. If this had happened a few
years after BH's purchase, maybe I'd be more generous.
Instead, to me this is evidence that even the best can be
fooled.

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R

Ron Peterson

I cannot parse the above.
In the S&P 500 GE represents 2.37% of the value and XOM represents
4.14% of the value both much above the 0.2% of value for the average
S&P 500 company.
It is true large caps are less likely to fail than small
caps. But their boards do blunder and/or accidents happen
costing them billions of dollars. Consider CSCO (dove 80% or
so over a few years), Enron, MRK (Vioxx), MO (cigarette
litigation), and WM (stupid Board yada overexposing the bank
to subprime mortgages). Could a serious climate disaster
take a huge toll on BH, especially if the Board blundered in
planning? I think so. I say this as a Buffett fan. Yet look
what BH did last summer: It bought BAC at prices around 50,
on the premise that BH likes stable, easy to understand
companies. BAC is now down to about 30 because of its
exposure to subprime loans. If this  had happened a few
years after BH's purchase, maybe I'd be more generous.
Instead, to me this is evidence that even the best can be
fooled.
Sure, that is why one should diversify. I haven't checked, but I don't
think CSCO's market price decreased by a failure of management, but
instead by over valuation by stock holders.

The OP wants to beat an anticipated very high inflation, his home
should take care of part of that, so what more can we tell him?

--
Ron

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E

Elle

In the S&P 500 GE represents 2.37% of the value and XOM
represents
4.14% of the value both much above the 0.2% of value for
the average
S&P 500 company.
? We're talking about a person's portfolio moving
significantly because 30% of it is a single stock. Five
percent allocations are fine, AFAIC. Some folks have a lot
of faith in GE or BH or PM or whatever large cap and so will
want to risk more on them. I think our disagreement is
fairly minor. Folks can take or leave my suggestion, though
I propose that doing as the OP is doing is not conventional
wisdom for what I would call a defensive investor.

Aside:
I haven't checked, but I don't
think CSCO's market price decreased by a failure of
management, but
instead by over valuation by stock holders.
CSCO management was said to be misleading the public about
its performance.

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C

Chip

Elle said:
Aside:

CSCO management was said to be misleading the public about
its performance.
Awwww, golly gee, large caps wouldn't do that, would they? Despite all
the so-called checks and over-sight, there seems to be an inordinate
amount of "misleading" going on. Is that really true, or just more
reporting of it?

Chip

--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
 

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