![]() The essence of that approach was that Avon Products, Polaroid or Disney, for example, had such assured long term growth prospects that one could virtually ignore price when making a long term commitment. A significant number of the “nifty fifty”, as they were known, have registered sharp declines from their 1973 highs, and this has caused some but by no means all major investment managers to re-think what was known as the “one decision” approach to buying common stocks. The much heralded two-tier market situation has obviously become blurred. Similar arithmetic applied to a 5% passbook savings account would make the headline above even more understandable. If in addition to this tax effect we postulate a 10% inflation rate it is very clear that an apparently superior return is a phantom and truly represents simply the maintenance of original purchasing power. If it is assumed, however, that this return is achieved through some combination of income and capital gains, it is likely that one-third of it, or 5 percentage points, would go to taxes. During the post-war period to date, for example, a pre-tax annual compound return of 15% would have been regarded as a superior if not handsome investment performance most investors did not fare nearly so well. The New York Times recently quoted Warren Buffett, the chairman of Berkshire Hathaway, with reference to what he terms “the investor’s misery index.” In essence, the index measures the gain or loss in the investor’s purchasing power after subtracting income taxes and the inflation rate from his gross return on his invested capital. This caption from an article in The Wall Street Journal not only alludes to the basic cause of our disorganized financial market - uncontrolled inflation - but emphasizes that there is literally no end to inflation’s negative ramifications. “Inflation Can Threaten Your Mental Health.” ![]() We believe there will be greater recognition of this fact in time. It is less apparent that the ownership of stocks also represents ownership in real property, and to the degree that one uses discrimination, stocks can be every bit as good a hedge against inflation as the average piece of real estate. People readily understand the inflation protection which comes from owning real assets, particularly real estate, for which there has been substantial demand, especially from abroad, in order to hedge against inflation. Such a company has little in the way of fixed assets and no inventory, and almost all of its reportable earnings are available to the stockholders if they can’t be used internally for interesting acquisitions to further growth. ![]() An advertising agency such as Interpublic, on the other hand, has almost a 15% automatic override on the growth, both real and inflationary, of the dollars spent on advertising in television, magazines and other media. ![]() For the most part, all reported earnings (and more) of the steel companies are devoted to this battle which has been made dramatically worse by inflation, and little is truly left for the stockholders. One is plagued by huge costs to replace outmoded, fixed assets simply to meet competition, both domestic and foreign, in an industry with chronic overcapacity worldwide. There is a remarkable difference, for example, between the prospects of a steel company and those of a major advertising agency. We try to analyze the effect of 8%-10% inflation on each company we study. While we have a low opinion of stock market predictions and the correlation of foreign policy and the price of Capital Cities Communications, we do place the expectation of future serious inflation as the paramount factor in investment planning and stock selection. Timeless Insights from Bill Ruane and Rick Cunniff.
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