Equity Investments and Inflation

Steven Bregman and Murray Stahl

Unlike a stock market crash, inflation erodes wealth insidiously and covertly. Given the unprecedented amount of stimulus provided by the US Government between 2008 and 2011, the utmost vigilance is required to protect the real value of assets from the effects of inflation. In this chapter we shall discuss some investment strategies that can help to achieve this objective. Traditional methods of acquiring inflation protection, such as purchasing physical gold or other commodities, might not be the most effective, as better and less speculative alternatives exist. In particular, there are business models, and thus equity securities, which benefit during periods of inflation yet do not necessarily depend upon inflation in order to prosper. In addition, under certain conditions, some fixed-income securities, such as convertibles, can also offer inflation protection. In this chapter we shall cover such equity strategies and examine their more salient characteristics.

INFLATION AND EQUITY PRICES

The complexities of inflation and how certain equity investments might mitigate its effects are not always as obvious as they may seem. It can be most challenging to discern the diverse

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