This is episode 002 of "Reading with AI." The Intelligent Investor (1973 4th edition + Jason Zweig's commentary), Chapter 2: The Investor and Inflation. At the end of the previous chapter we left a question hanging: by the end of 1971, bond returns (8% before tax) were already clearly higher than stocks (7.5%), yet Graham still didn't recommend going all-in on bonds, deferring the reason to inflation. This chapter is where he settles that account. And his answer will make both camps uncomfortable—the bond camp was wrong, and the stock camp was wrong even worse—because, using 55 years of data, he demonstrated something counterintuitive: there is no close connection between inflation and the earnings and prices of common stocks.

Reading with AI · Investment Classics
Inflation sends no notice and leaves no trace, yet quietly takes a few percentage points of your purchasing power every year

The Core Question of This Chapter

How much should the expectation of rising future prices affect the investor? And, since inflation erodes fixed dollar-paying income, does that mean all your money should go into stocks?

Graham's Main Text

Key Point 1: The Real Opponent of This Chapter Is the Popular Conclusion "Go All-In on Stocks"

First, let's set the scene of the prevailing opinion at the time. The shrinking purchasing power of the dollar—especially the fear that it would decline substantially further (Graham added acidly: perhaps speculators were hoping just that)—had profoundly shaped Wall Street's thinking. The chain of logic looked airtight: as the cost of living rises, fixed income payable in dollars suffers, and so does a fixed principal; whereas for stockholders, rising dividends and share prices might offset the loss of purchasing power.

From this, many financial authorities drew two conclusions:

Bonds are intrinsically an undesirable investment form;
Hence, by their nature, stocks are a more desirable investment than bonds.

How extreme did it get? Some recommended that charitable portfolios consist entirely of stocks, with a bond allocation of zero. Graham took care to point out this was a 180-degree turn—in earlier eras, the law had restricted trust investments to bonds and a small amount of preferred stocks.

The period detail Zweig added in a footnote is vivid: this advice, originally suited only to foundations and endowments with an "infinite investment horizon," spread in the late 1990s to individual investors with finite horizons. In 1994, Jeremy Siegel, a professor at the Wharton School, published Stocks for the Long Run, advising investors "able to take risk" to buy stocks with borrowed money—borrowing more than a third of their net worth, i.e., putting 135% of their assets into the stock market; in February 1999, Richard Dixon, the widely respected treasurer of Maryland, told an audience at an investment conference: "None of you should ever own another bond fund."

Graham's response is the anchor of the whole chapter, and he spares neither side:

Even quality stocks cannot be better than bonds under all conditions. We cannot hold that, no matter how high the market has climbed or how much lower the dividend yield is than bond interest rates, quality stocks are a better investment than bonds. The contrary assertion—that any bond is safer than stocks, as we so often heard in prior years—is equally mistaken.

Notice the structure of that statement: he isn't picking a side between two camps; he is rejecting the very framing of the question—"comparing asset classes apart from price." This is the same skeleton as Chapter 1's "the investor judges market prices by established standards of value."

Key Point 2: Three Conclusions from 55 Years of Data

Graham's method is plain: lay out, in five-year intervals from 1915 to 1970, the general price level, corporate earnings, and stock market values in one table (Table 2-1; he substitutes 1946 for 1945 to eliminate the effect of wartime price controls).

Conclusion 1: Inflation is nothing new, and investors must expect it to continue or recur.

Period	What happened
1915–1920	The most severe episode—the cost of living nearly doubled
The intervening decades	3 periods of price decline, followed by 6 rises of varying magnitude (several rather weak)
1965–1970	Relatively mild: prices rose only 15%

Conclusion 2: What level should we expect going forward? He offers an anchor to think and decide by.

Over the past 20 years, consumer prices rose on average 2.5% per year;
1965–1970: 4.5% per year; 1970 alone: 5.4%;
Over the whole 1915–1970 span, annual inflation was 2.5%.

Given that official government policy was strongly anti-inflationary, and there was reason to believe Federal Reserve policy would be more effective, he advised investors to assume an inflation rate of around 3% for the years ahead (while candidly admitting "this is far from certain").

Here is a misjudgment that must be honestly flagged, and Zweig points it out directly in a footnote: in 1973, just two years after Nixon imposed wage and price controls, inflation reached 8.7%, its highest point since World War II; 1973–1982 was the most inflationary decade in modern American history, with the cost of living more than doubling.

What does 3% mean? Graham's arithmetic is restrained: it would wipe out half the interest on medium-term tax-free high-grade bonds (or high-grade corporates after tax). That is indeed a serious loss, but it should not be overstated—it does not mean the investor's real wealth or purchasing power must necessarily decline: if he spends only half his after-tax interest, he can still maintain his original purchasing power even at 3% annual inflation.

Conclusion 3 (the most counterintuitive in the chapter):

Viewed over time, there has been no close relationship between the state of inflation (or deflation) and the earnings and prices of common stocks.

The best counterexample was right in front of him: from 1966 to 1970 the cost of living rose 22%—the largest five-year rise since 1946–1950—yet since 1965, both the earnings and the prices of stocks declined. And in several of the preceding five-year periods, the opposite combination had occurred.

Along the way, he honestly reports stocks' 55-year report card, then immediately delivers the crucial cut:

The Dow rose from an average of 77 in 1915 to an average of 753 in 1970, a compound 4% per year, plus about 4% in dividends, for a total of 8%;
That is of course far better than bond returns over those 55 years—but it does not exceed "the return currently offered by high-grade bonds."

This raises the key question: do we have good reason to believe stocks will do much better over the future than over the past 55 years? His answer is no: "Common stocks may do better than before, but that outcome is highly uncertain."

And the passage he adds about the time factor is the easiest to skip in this chapter yet the closest to real human nature: what happens over the long run (say, the next 25 years) is one thing; how the investor's own financial and psychological condition will change over the short or intermediate term (five years or less) is another—

His thoughts, his hopes and fears, his satisfaction or dissatisfaction with past results, and above all his intentions for the future—all of these are determined not by thinking about past investments, but by experience, year after year.

Key Point 3: The Crux Is at the Corporate Level—Inflation Does Not Raise the Return on Capital

Why don't stocks track inflation? Graham takes his scalpel inside the corporation to examine the return on capital.

The fact is that this rate of return certainly fluctuates with the general level of the economy, but it has shown no general upward trend as wholesale prices or the cost of living rose. On the contrary—over the past 20 years, despite inflation, corporate profit margins actually declined notably (partly attributable to higher depreciation rates).

He also, almost in passing, runs a "book value vs. market price" valuation conversion that's well worth learning:

Over the past 5 years, the earnings of the Dow Jones components ran about 10% of their tangible assets (book value);
But in mid-1971, the Dow's market value was 900 against a book value of 560;
So the return computed at current market prices was only about 6.25%—put the other way: the Dow at 900 equated to an 18× P/E ratio on earnings for the year ending January 1971.

This meshes perfectly with Chapter 1's expectations: a 3.5% dividend yield plus 4% appreciation from reinvested earnings (which implicitly assumes that for every $1 of book value added, market value rises by about $1.60).

The reader will surely object: why didn't your calculation include the added earnings and value from 3% annual inflation? Graham's answer is the analytical core of the chapter:

Historically, the rate of inflation has had no direct effect on corporate earnings per share. All the large increases in the earnings of Dow Jones components over the past 20 years came from the large growth of invested capital built up by reinvested profits.

If inflation were truly an independent favorable factor, it would raise the "value" of companies' existing capital, which would raise the return on that existing capital, and thereby raise the return on both old capital and newly formed capital. But over the past 20 years, this has never happened—even though the wholesale price index rose 40% over the same period. (Wholesale prices matter more to corporate profits than consumer prices do.)

The only way inflation can add to stock values is by increasing the rate of return on corporate capital investment. But the historical record shows this has not occurred.

Nor does he dodge the popular view that "moderate inflation is good for corporate profits": in past business cycles, companies' good years coincided with inflation, and their bad years marched in lockstep with falling prices; the sustained prosperity and rising prices of 1950–1970 did indeed feed each other. But the data show that inflation's effect on the earning power of equity capital is small; in fact, it cannot even maintain the prior rate of return on invested capital. What, then, has prevented the growth of American corporations' overall real rate of return? He names the two most important factors:

Wages have grown faster than productivity;
The need for huge amounts of new capital has depressed the ratio of sales to invested capital.

Then comes the most glaring set of numbers in Table 2-2 (Graham grumbled that, oddly, "economists and Wall Street pay little attention to them"):

	1950	1969
Corporate net debt	$140.2 billion	$692.9 billion (nearly a 5-fold increase)
Pre-tax earnings	$42.6 billion	$91.2 billion (barely more than double)
Pre-tax earnings after interest / debt	about 30%	only 13.2% (1970 was surely worse)

The inference is razor-sharp: a large part of that 11% return on corporate capital came from the massive new debt (costing 4%, less after the tax advantage). Therefore—

Despite inflation, if corporate debt had remained at its 1950 level, earnings on equity capital would have declined even further.

And with interest rates having risen sharply, this former "booster" had become a significantly negative economic factor—for many individual companies, "a genuine nuisance." The claim that inflation benefits corporations and their shareholders is far removed from the data in Table 2-2; its actual effect is precisely the opposite.

A textbook-grade contrarian call: the stock market judged public utilities to be inflation's biggest victims—their debt costs were soaring while price controls kept them from raising rates. Graham pointed to two contrary facts: the unit costs of electricity, gas, and telephone service had risen far less than the price index over the same period; and by law, they are entitled to charge rates sufficient to earn a fair return on their invested capital. So they were actually in a strong strategic position, and their shareholders could remain as immune to inflation as in the past.

Key Point 4: So What Happens If You Bet on Stocks?—"It Will Fluctuate"

Having carried the analysis this far, he pulls the conclusion back down to a single number: the investor has no reason to expect an overall average return above 8% from buying the Dow Jones components at their price levels of late 1971.

But the next passage matters even more—even if that expectation proves far too low, that understatement will not come true for the person who invests entirely in stocks. Why?

If one thing about the future is certain, it is this: the earnings and average annual market value of a stock portfolio will not grow uniformly at 4% (or at any uniform rate). In the words of the old-timer J. P. Morgan: "It will fluctuate."

That phrase "it will fluctuate" unpacks into two very concrete consequences:

The person who buys stocks at today's or tomorrow's prices may fail to obtain a satisfactory return for many years thereafter. His example is brutally sobering: after the 1929–1932 crash, General Electric's stock (and the Dow) took 25 years to regain their former levels.
If all his money is concentrated in stocks, the investor is likely to be led astray by exhilarating rises or painful declines—and "this is more likely when he believes inflation will intensify":

For at such a time, if a new bull market arrives, he will not see the big rise as a danger signal of an eventual decline and a chance to take handsome profits; instead he will read it as confirmation of the inflation thesis, and thus keep buying common stocks, no matter how high the market level or how low the dividend return. This course is bound to end in regret.

This is the chapter's most brilliant psychological insight: a correct macro judgment (inflation will persist) gets emotionally repurposed into "a license to buy regardless of price." The firmer the macro conviction, the more easily valuation discipline gets sacrificed.

Key Point 5: Inflation Hedges Other Than Stocks—Graham Rules Them Out One by One

① Gold. The world's standard answer, but his ledger doesn't look good: after 1935 it was illegal for U.S. citizens to hold gold (he said this "was perhaps just as well for American citizens"); over the past 35 years the open-market gold price rose from $35 an ounce to $48 in 1972, a gain of only 35%; during that period the holder earned no capital return at all and actually paid carrying costs every year. His verdict: money in a savings account would have done much better, even though the general price level rose over the same period.

Gold's near-total failure to protect the purchasing power of the dollar must give the ordinary investor serious doubts about the ability of "real things" to guard against inflation.

This one was later proven spectacularly wrong, and Zweig doesn't paper over it. The investment philosopher Peter Bernstein considered Graham's view of precious metals, and gold in particular, "badly mistaken"—as it turned out, at least in the years after this chapter was finished, gold rose far faster than inflation. The correction offered by the adviser William Bernstein is an elegant asymmetric-odds idea:

If gold does poorly, putting 2% of total assets into a precious-metals fund won't much affect overall returns; but if gold does brilliantly, its gains are often spectacular (annual gains even above 100%), and on its own can light up an otherwise dreary portfolio.

But the intelligent investor does not buy precious metals directly (avoiding hefty storage and insurance costs), instead finding a mutual fund diversified across precious-metals-mining stocks with an annual fee under 1%; capped at 2% of total financial assets (perhaps 5% if you're over 65).

② Collectibles. Diamonds, Old Masters, first editions, rare stamps and coins have fetched big price gains over the years, but his assessment is unsparing: "in many if not most cases, the quoted prices are artificial, unreliable, or even false." Paying $67,500 for a coin dated 1804 (though not actually struck that year)—"it is difficult to think of such a procedure as investing." He is frank, too, that this is not his field, and that for the vast majority of readers it is not a safe and easily mastered trade.

③ Real estate. Long believed to combine long-term investment with preservation of value, but he lists four realities: prices are equally subject to wide fluctuations; the buyer can make serious mistakes in location and in the price paid; misleading salesmanship can also trip people up; and the investor of modest means can hardly achieve diversification except through partnerships—which bring their own special difficulties in raising money. His advice is a single line: "Before entering it, make sure you know the field."

Key Point 6: The Conclusion—So We're Back to Asset Allocation

The ending pulls the whole chapter back to Chapter 1's position, and the wording of the reason matters greatly:

It is precisely because the future is uncertain that the investor cannot put all his funds in one basket: not entirely in the bond basket—even though bond interest recently reached unprecedented levels; nor entirely in the stock basket—even though inflation may well continue.

Immediately follows the most practical principle of judgment in the chapter (worth copying onto the first page of your investment notes):

The more the investor depends on his portfolio and its income, the more he must guard against unforeseen outcomes and the disruption they could bring to his life.

He then offers a set of "unglamorous but thoroughly clear-eyed" judgments: buying a bond yielding close to 7.5%—of, say, a telephone company—involves far less risk than buying the Dow components at 900 (or any similar stock portfolio); but the possibility of large-scale inflation remains, and the investor must provide against it—one kind of stock cannot properly insure against such a risk, but it gives more protection than one kind of bond.

Finally he reproduces verbatim the wording from the 1965 edition, saying "what we would say today is exactly the same":

The reader should clearly understand that at present market levels (Dow Jones average 892), we are not enthusiastic about common stocks. But, for the reasons given, we feel that the defensive investor must keep a substantial proportion of his portfolio in common stocks, though we view the practice as the lesser of two evils—that of holding bonds exclusively being the greater risk.

Weigh that statement carefully: holding stocks is, for Graham, not because "stocks are good," but because "not holding them is worse." That is an entirely different tone from today's fashionable "always be fully invested in stocks for the long run."

Jason Zweig's Commentary (Fourth Edition)

He opens with a one-liner from the comedian Henny Youngman: "Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars' worth of groceries. Now, a five-year-old can do it."

Commentary 1: "Inflation Is Dead"

The environment when Zweig wrote was precisely the opposite of Graham's: from 1997 to 2002, prices of goods and services rose only 2.2% a year, and economists believed true inflation might be even lower (think of the plunging prices of computers and appliances in those years, and how better product quality meant the same spending bought more value). America's real annual inflation rate may have been only about 1%—so slight that many authorities began proclaiming that "inflation is dead."

Two details in the footnote carry a lot of information: the Boskin Commission of 1996 (a government-appointed group of economists investigating whether official inflation statistics were accurate) concluded that inflation was overstated by nearly 2% a year; and many investment experts then considered deflation a bigger threat than inflation—the best hedge against deflation risk is precisely to always include some bonds in your portfolio.

(This detail is delicious: Graham uses "inflation is uncertain" to argue for holding stocks; Zweig uses "deflation is possible" to argue for holding bonds—two men arguing from opposite directions toward the same conclusion: own both.)

Commentary 2: Money Illusion—Why People Casually Overlook Inflation

This is the concept from this chapter's commentary most worth remembering.

If your income rose 2% in a year when inflation ran 4%, you'd surely feel that's better than "income falling 2% with zero inflation." In fact, the two changes lead to the same result: after inflation, your standard of living fell 2% either way.

The mechanism: as long as the nominal (absolute) change is positive, we feel it's a good thing, even if the real (inflation-adjusted) outcome is negative. The reason—you feel changes in your own pay far more vividly and concretely than changes in the general price level. (The academic source is "Money Illusion" by Shafir, Diamond, and Amos Tversky, collected in Choices, Values, and Frames, edited by Kahneman and Tversky.)

The investing side holds the same trap:

	A bank CD in 1980	A bank CD in 2003
Nominal rate	11% (heartfelt joy)	2% (genuine dismay)
After inflation	the real rate is negative	roughly matches inflation

The nominal interest rate we earn is the one banks advertise everywhere, and a high one makes us feel good. But inflation silently devours our handsome interest; it doesn't announce itself, yet it takes our wealth. That is why people so easily overlook inflation.

Therefore, the measure of your investing success is not how much you made, but how much you have left after subtracting inflation.

Commentary 3: Three Reasons Inflation Is Not Dead

① It was not long ago. From 1973 to 1982, the U.S. experienced the worst inflation in its history: the price level doubled, nearly 9% a year on average, and 13.3% in 1979 alone, plunging the American economy into so-called "stagflation" and leading many prominent commentators to question whether the U.S. could still compete in global markets. (That was the year President Carter delivered his famous "malaise" speech, saying a "crisis of confidence" was eating away at "the very heart and soul of our national will.") A product or service that cost $100 in early 1973 cost $230 by the end of 1982—the purchasing power of $1 fell to less than 45 cents. Anyone who lived through that period felt the pain of lost wealth; every prudent person must guard against a repeat.

② This is not a uniquely American problem. Since 1960, 69% of the world's market economies have experienced at least one year of inflation at or above 25%; overall, these episodes cost investors 53% of their purchasing power. "We can certainly hope that America never suffers such a disaster; but to believe it could never happen again is a grave mistake."

③ The government has an incentive. Rising prices let Uncle Sam repay its debts in cheaper dollars. Eliminating inflation altogether runs directly against the economic self-interest of any government that habitually borrows. (Zweig attributes this "rather cynical but accurate" insight to Laurence Siegel of the Ford Foundation; he also notes that in deflationary times lending beats borrowing—which is exactly why investors should keep at least a small slice of their assets in bonds.)

A historical Easter egg from the footnote: the U.S. has in fact experienced two bouts of hyperinflation. During the Revolutionary War, prices roughly tripled every year from 1777 to 1779—in Massachusetts a pound of butter cost $12 and a barrel of flour nearly $1,600; during the Civil War, inflation ran at 29% in the North and nearly 200% in the Confederacy. And in 1946, U.S. inflation hit 18.1%.

Commentary 4: Stocks Are Only a "Partial Hedge"

Ask "how do I protect against inflation," and the usual answer is "buy stocks"; but Zweig says, like most "usual answers," that is not entirely correct. Using the correspondence between inflation and stock returns from 1926 to 2002 (Figure 2-1), he delivers bad news at both ends:

Inflation environment	Stock performance
Falling prices (deflation)	Quite bad—total stock market value has fallen as much as 43%
Moderate inflation	Best performance: companies can pass higher raw-material costs on to consumers
Inflation above 6%	Also poor: there were 14 such years, 8 of them negative; the average return across the 14 years was just 2.6%

The mechanism is stated bluntly: while moderate inflation lets companies pass costs on to consumers, runaway inflation wreaks havoc—it forces consumers to cut back and chokes off activity at every link in the economy. (On why deflation isn't good either, he cites Japan: entering an era of falling prices in 1989, with real estate and stock values declining year after year—a merciless torment for what was then the world's second-largest economy.)

And over the long run? Since reliable stock market data began in 1926, there have been 64 five-year periods (1926–1930, 1927–1931, … through 1998–2002), of which 50 (78%) saw stock returns exceed the inflation rate over the same span.

That's good, but not perfect—because for roughly one-fifth of that period, stocks failed to keep pace with inflation.

(He adds a line of international evidence: over the 20th century, Belgium, Italy, and Germany also had high inflation, and "inflation hurts stocks as well as bonds.")

That is the full meaning of the "partial hedge" subheading: stocks are a necessary tool against inflation, but not an insurance policy.

Commentary 5: Two New Instruments That Appeared After Graham's Day

① REITs (real estate investment trusts)—companies that own commercial and residential properties and collect rent on them. Combined with real estate mutual funds, REITs have done "a decent job" of inflation protection; the low-cost options Zweig names include the Vanguard REIT Index fund, as well as Cohen & Steers Realty Shares, Columbia Real Estate Equity Fund, and Fidelity Real Estate Investment Fund.

While a REIT fund is not a perfect inflation hedge, over the long run it can to some extent protect you from losing purchasing power without dragging down your overall returns.

One very practical reminder: if you own a home, you already have real estate ownership, which reduces your need to invest in REIT funds.

② TIPS (Treasury Inflation-Protected Securities)—first issued by the U.S. government in 1997, their interest rate automatically rises as inflation rises. With the full faith and credit of the government, all Treasury bonds carry no risk of default or missed interest payments, and TIPS additionally guarantee that the value of your investment will not be eroded by inflation.

But there is one annoying trap:

After the value of your TIPS rises with inflation, the IRS treats that increase as taxable income—even though the gain is entirely on paper (unless you sell at the newly reached higher price).

(Zweig here quotes the warning of the analyst Mark Schweber: "Never ask a bureaucracy 'why?'")

So the usage guidance is concrete:

TIPS work best inside tax-deferred retirement accounts (IRA, Keogh, 401(k)), which don't inflate your taxable income;
You can buy them directly at the government's website or through low-cost funds (such as inflation-protected securities funds from Vanguard or Fidelity);
Don't sell them: in the short run TIPS can be volatile; it's best to hold them for life;
For most investors, putting at least 10% of retirement assets into TIPS is "a sensible move—it can keep part of your money in a state of absolute safety, completely beyond the invisible grip of long-term inflation."

Untangling This Chapter's Hard Parts

Hard part 1: Where exactly does "stocks hedge inflation" go wrong?

It mistakes "a statistical regularity under long-term moderate inflation" for "a talisman that works everywhere, all the time." The two layers of evidence must be kept separate:

Graham's mechanism layer: for inflation to genuinely raise stock values, it must raise the rate of return on corporate capital investment—which has never happened historically; all earnings growth over the past 20 years came from reinvested profits, not from a gift of inflation.
Zweig's boundary layer: in the 14 years when inflation exceeded 6%, stocks averaged just 2.6% with 8 negative years; deflation years were worse, with market value down as much as 43%; about one in five of the 64 five-year periods failed to beat inflation.

So the correct statement is: stocks can partially keep up under moderate inflation, and work poorly at both extremes—runaway inflation and deflation.

Hard part 2: Why is the 8% stock return over 55 years "not good news"?

Because Graham immediately adds: it does not exceed "the return currently offered by high-grade bonds." A historical return must be compared against the alternative you can get today, not against historical bonds. This is the most easily skipped step in valuation thinking—the attractiveness of any asset is relative and moves with interest rates.

Hard part 3: Why is the reasoning "inflation will continue, so buy stocks" dangerous?

The danger lies not in the math but in the psychology: someone fully invested in stocks who firmly believes inflation will deepen will read a bull market's big rally as validation of his macro view rather than "a danger signal of an eventual decline," and so keep buying no matter how high the market or how low the dividends. A correct macro opinion, emotionally repurposed into a license to ignore price. Stack on top of that the time scale of GE taking 25 years to recover, and the consequences are plain.

Hard part 4: Graham got gold wrong—how should we learn from it?

The lesson isn't "he was wrong," but the corrected form Zweig offers: not overturning the conclusion to chase gold, but demoting it to a small-position, big-odds allocation (≤2%, via a low-fee precious-metals stock fund rather than bullion). When a judgment could be wrong and the wrong side carries huge odds, the right response is to control the position size, not to change your stance. This is itself a rehearsal of margin-of-safety thinking (Chapter 20).

One-Line Takeaway

Not losing money ≠ not getting poorer: the measure of investing success is not how much you made, but how much you have left after inflation. But don't replace one illusion with another—inflation has never genuinely raised the corporate return on capital, so stocks are only a partial hedge, and they look just as ugly when inflation runs too high or turns into deflation. Precisely because the future is uncertain, the answer is always "own both stocks and bonds," and the reason to hold stocks is not that "stocks are good," but that it is the lesser of two evils.

Questions to Sit With

Run a "money illusion" check on yourself: over the past three years, which nominal numbers have made you happy (a raise, a wealth-management rate, a paper gain)? Subtract inflation from each—which ones were actually negative?
Graham says "the more the investor depends on his portfolio and its income, the more he must guard against unforeseen outcomes." By that rule, does your current stock/bond split match how dependent you are on this money? Would the answer change if you needed the money next year?
He warned of one form of self-deception: someone convinced inflation will deepen treats a big bull run as "proof" of his view and keeps buying more. Do you hold a similar macro belief right now (say, AI, some country's industries, some currency trend) that you're using to exempt yourself from valuation discipline?
Apply the "small position, big odds" framework to your portfolio: is there an asset class worth holding at ≤2%—where you're buying not its certainty, but the asymmetric payoff if it turns out right?

Next episode: Chapter 3, "A Century of Stock-Market History: The Level of Stock Prices in Early 1972"—Graham lays out nearly a hundred years of highs and lows since 1871, 19 bull-and-bear cycles, and then does something few people today are willing to do: using the relationship among stock prices, earnings, and dividends, he gives a computable answer to "is the current market expensive?"—rather than going by feel.

Reading with AI 02 | The Intelligent Investor: Chapter 2 — The Investor and Inflation