How to invest for inflation

These are our best ideas on how best to invest in times of inflation

This the editorial of our monthly Quant Value Investment Newsletter published on 04.10.2022.

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This month you can read about how to invest for inflation.

But first the portfolio updates.


Portfolio Changes

Europe – Sell One

No new recommendations this month as the index is below its 200-day simple moving average.

Continue to hold Pendragon PLC (November 2021 recommendation up +47.1%) in spite of a potential takeover as the company is looking at alternatives and is still cheap at the current price.


Stop Loss Sell

Sell Arctic Paper S.A. +146.9%


North America – Nothing to do

No new recommendations this month as the index is below its 200-day simple moving average.


Asia – Hold Two

No new recommendations this month as the index is below its 200-day simple moving average.

Continue to hold:

- APT Satellite Holdings Limited (-3.3%)

- E J Holdings Inc. (+3.2%)

From last year as they both still meet this portfolio’s selection criteria.


Crash Portfolio – Buy One

One new idea for the Crash Portfolio this month.

The company is a Singapore-based food manufacturer engaged in the marketing and distribution of chocolate and chocolate confectionery. It is attractively undervalued  trading at Price to Earnings ratio of 8.4, Price to Free Cash Flow of 7 times, EV to EBIT of 4.1, EV Free Cash Flow of just over 5 times. It also pays you an attractive dividend of 5.6%.



How to invest for inflation

In an email a few weeks ago, I gave you a few ideas on how to invest for inflation. In this weeks’ newsletter I want to give you additional thoughts to help you make the best of the current situation.


Worried about inflation?

Depending on where you live your inflation rate is around 8% to 10%. How to hits you depends on how much you spend on what has increased the most. If you drive a lot your inflation may be higher.

For example, in the first week of September I got a letter from my gas supplier. The gas to heat my apartment will go up 213% from October, just when it starts getting cold here in northern Germany.

It was a shock, but it will not hit me too hard because heating makes up a small part of my expenses.

Another fear, a lot of subscribers have mentioned, is what can they do with the cash they are holding.


Holding cash at the moment

I am about 22% in cash at the moment. No investments just cash.

I bought some tobacco stocks in 2020 as a bond alternative. I also bought inflation protected bonds, but they performed poorly when rates and inflation expectations increased so fast, so I sold some at a slight loss.

For the rest I am patient with my cash. I do not want to invest into a falling market, but I am sure interesting opportunities will present themselves soon.

I lived through decades with 10-15% inflation in South Africa so I am not in a hurry to do something stupid, just because of the pressure to invest in “something”.


What about interest

If, lime me you have been thinking about investing in interest bearing securities, bank deposits or bonds, forget it!

The financial crisis has added so much debt to countries worldwide, over 100% of GDP in the USA and 150% in Italy, that central banks cannot increase interest rates much, before countries start running into serious interest expense problems.

This means positive real interest rates (interest rates greater than inflation) are unlikely or likely to be short lived.

If you are thinking of buying long term bonds, attracted by the higher interest rate be careful. Long term interest rates have been increasing off record lows which means they may have a lot further to go.

As you know the longer the bond’s maturity the bigger the price move will be if interest rates go up. And the real (after inflation) rate on these bonds is still negative.


What about TIPS

I have a small investment in a Treasury Inflation Protected Securities (TIPS) ETF but its performance so far is negative. This is because the yield on these bonds were also at record lows. When interest rate expectations increased the price of these bonds fell.

I expect that they will do better once adjustments (interest and capital) for inflation are made, but so far, it has been a losing investment for me.


Okay, so what can I do?

If all these options are bad, what can I do with my money you may be thinking.

My best answer is quality, undervalued companies such as the ones we recommend in the newsletter here.


Take small positions

If you want to start investing now, start small. Don’t put too much money to work because markets are still falling.

Start with smaller positions than usual and increase them as the market moves up. But make sure that you use a trailing stop loss. You can even look at a smaller stop loss than the 20% we use in the newsletter, 10% or 15% for example.

Remember with stocks you want to counter the effect of inflation not make it worse by losing money.


Other investment ideas

Other investment ideas I have mentioned are bond like alternatives in the stock market.

The best idea I have come up with is tobacco companies. Because of ethical considerations these companies have been ignored making their dividends really attractive. Depending on your ethical considerations you may or may not want to buy them.

I analysed a lot of them and in the end decided to buy a basket as I could not say, which one will perform best.


I also bought an Oil and Natural Gas ETF to give me exposure to the record high prices. I know these companies have record profits but in spite of that a lot of investors have avoided them.

This could be either because of environmental or ethical reasons or just because they think the record profits can only go down from here.

That may be true, but high oil and gas prices may be around for longer than we know. If that is the case these companies are trading at really attractive valuations and pay high dividends.

They can be volatile, as we have seen, so use a stop loss.


If you are having trouble sleeping

Your investments should never give you trouble sleeping. If they are I recently read something that may help you.

Either sell down to where you can sleep comfortably. Or if your cash holdings, and fear of inflation are causing insomnia, buy up to the point that you can sleep again.



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