There seems to be no doubt that, in general, a managed, diversified portfolio of US common stocks has provided investors with ample protection against inflation over the last half century.

There is, however, a question as to whether a similar level of inflation-protection through common stocks will continue to be available over the next fifty years.

Intrinsic Kernels of Inflation Protection

To the extent that a class of securities has a legal claim to assets that will increase in value with inflation, that class of securities may be said to have inherent protection against inflation.

Certain assets offer no protection against inflation whatsoever. These assets include investments in cash, fixed-principal-and-interest bonds, and accounting intangibles such as good will.

Other assets, such as real estate and commodities, tend to increase in value with the consumer price index.

It is useful to think of different investments as offering varying degrees of protection against, depending upon how large a “kernel” of inflation-resistant assets they have relative to the assets that make up the investment.

	Intrinsic Inflation Protection Varies

For a simple example, let us define inflation as the price of gold. Let us imagine two boxes of equal size, one entirely filled with gold, the other empty, except for a small cube of gold.

If both of these boxes sell for the same price, it is clear that the box entirely filled with gold has a greater “kernel” of inflation-protection that the box with only a small cube of gold.

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The problem with finding a way to expense stock options lies in the reluctance of company executives and market intermediaries to acknowledge the true cost and to the meddling of theoretical economists in areas best left to practical accountants. This can be illustrated with a simple example.

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