Sunday, November 14, 2010

Shares as a safeguard against inflation

Previously published on the Broad Oak Blog (Nov. 14, 2010):

It is well-known that German money became worthless in 1923, thanks to hyperinflation. The value of cash savings was wiped out; fixed rents also became worthless, which benefitted the ordinary person; but practically all one's income was spent on food, instead (see Table 6 at the bottom of this page).

What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.

UPDATE: As Michael Panzer points out, what I called a "pullback" should more properly be termed a horrendous crash! Unless you have the titanium nerve to hold on through such an event, there is a grave danger that you could buy in now and sell in a panic later and lose most of your wealth.

CLARIFICATION / CORRECTION:(I should have made it clearer that the graph above is not mine - it comes from the site I linked to in the text, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)

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James Higham said...

Yes but that's a highly dangerous activity comparing the conditions then and now. Also, we're in the EU which forces strange outcomes, whereas then what happened happened.

Sackerson said...

Understood that the system is now weird and corrupt, though it was then too otherwise Germany wouldn't have been forced into hyperinflation.

But Marc Faber maintains that a at currency like the dollar will go to zero. After all, there's nothing behind it and every reason to increase the supply for temporary personal advantage, whereas shares usually have some sort of backing. The Santa Fe railroad was bust in the 70s yet some smart investors bought the shares because that gave them ownership of the hard assets - land, rails and rolling stock etc.