Friday 21 September 2012

Finding it harder to find value

Due to the latest market increases, fewer and fewer of our favourite companies are at or below what we consider to be fair value, however fair value can depend on where we think inflation (or deflation) will average over the next decade.



Ben Bernanke has lit a match close to an open flame which has the potential to ignite. Whilst we are still worried about anemic economic growth in the western world after some spectacular asset bubbles and corresponding debt, the more the central bankers promise, the greater the threat of inflation.

With a recovering housing market in the US, soft commodities hitting highs and a sense of confidence returning thanks to Super Mario and Booster Ben, we may see inflation rear its ugly head at some stage over the next few years. I would suspect that this is what the central governments are trying to induce to inflate away the enormous debts (but would never admit), but they should be careful for what they wish for.

For those that need to live off their capital for the rest of their lives, having a large majority of your money in "safe" assets such as cash and bonds may actually destroy capital at a faster rate than you could imagine. Double digit inflation like in the 70's can eat away at your capital extremely quickly if you are in low to mid single digit fixed return assets.


For those thinking all shares have inflation protection, I must stress that this is blind faith.

During times of high inflation, having pricing power in a business is paramount and very few businesses posses this quality.

Capital intensive infrastructure businesses can hold some inflation protection as it becomes more expensive to replace the capital assets than it is to hold existing assets. Regulation of these assets can take a bit of shine off this protection.


No one knows the future, however you should always attempt to prepare for the worst and hope for the best...

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