A very good article in The Wall Street Journal, How to Profit From Inflation.

It provides advice on how to survive the looming inflation. For that alone, it is worth a read.

But the article also reinforces some of the topics we have discussed in this blog.

Systematic Risk

Inflation is a systematic risk. It affects all entities in some capacity.

In Brazil, where the Consumer Price Index (CPI) is expected to rise 5.6%, all consumers and businesses will be impacted to some extent. While one can try and protect themselves or their companies, it is not an easy thing to do with a 5.6% rate of inflation.

When investing, always be cognizant of factors outside the control of company. Especially ones that can have adverse impact on the asset’s performance.

Nonsystematic Risk

While inflation is a systematic risk, other items mentioned are more nonsystematic in nature. That is, variables that affect specific companies or assets.

For example, consider silver which has increased in price 56% over the last 6 months.

The Downside to Nonsystematic Risk

Often, nonsystematic risks can negatively impact a company or asset.

Historically, silver has been a input in film manufacturing. As such, increased silver prices will increase costs for film related companies. To the extent these costs are not hedged or cannot be passed on to consumers, this will harm a company’s profitability.

For example, look at this Eastman-Kodak article.

A new problem for Kodak is the rising price of silver, a key ingredient used in the manufacturing process of the company’s film. Over the second half of 2010, silver rose to $30 per troy ounce from $16 per troy ounce, which will affect the company from an earnings and inventory standpoint, said Brad Kruchten, president of Kodak’s film business.

When seeing inflation, look at the individual components driving it. Those factors will affect some companies and assets more than others.

Be aware and protect your own positions through risk management techniques.

The Upside to Nonsystematic Risk Factors

Nonsystematic risk can also provide opportunities as well.

If you own shares in a silver producer, you may be a happy investor.

Look at Pan American Silver Corp. (PAAS), one of the world’s largest silver producers. Its share price has risen from $22.48 on February 11, 2010 to on $34.49 on February 11, 2011. An increase of 53.4% for the year. Not bad.

But that is stock picking, you say. And I recommend passive investing.

Fair enough.

How about the iShares Silver Trust (SLV). A fund that invests directly in silver. Its 1 year performance to December 31, 2010 (per iShares data) was 79.44%.

Or the PowerShares DB Silver Fund (DBS)  that invests in silver futures. Its 1 year return to December 31, 2010 (per Powershares data) was 81.53%.

Finally, we can look at a fund of silver producers.

PowerShares Global Gold and Precious Metals Portfolio (PSAU), while not a pure silver producer play, returned 34.57% for the year ended December 31, 2010 (per Powershare data).

And Global X Silver Miners ETF (SIL) increased from $14.74 on April 20, 2010 (day it started to trade) to $23.61 on February 11, 2011. An increase of 60.1% in less than 10 months.

As you can see, where there are risks, there may also be related opportunities.


If you want to become a successful investor or prosper in business, I think it is important to understand economics.

The linked Wall Street Journal article is ostensibly about investing and inflation. But consider all the underlying economic issues contained therein. Emerging market economies, banking capital requirements, interest rates, commodity prices, etc. To understand inflation requires a knowledge of other economic topics.

Many systematic risks relate directly to economics. Interest rates, currencies, sociopolitical issues, and inflation.

You need to be able to identify the relevant issues and know how they will impact your business or investments.

If you do, your probability of finding opportunities and minimizing threats will improve.

Portfolio diversification is another issue that resonates in the inflation story.

We will look at that next time.

1 Response » to “Investment Lessons From Inflation”

  1. Investment is the best way to make your money double rather than depositing it in banks. You posted a nice article about it, thanks for it.

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