A Random Walk Down Wall Street - Book Report/Review Example

Although investment itself is an extraordinarily complex topic to discuss, a salient issue that cannot be forgotten is the fact that inflation has a direct, immediate, and measurable impact with regards the overall return on investment that individuals can hope to expect. In brief, inflation has been defined as “a sustained rise in the overall price levels of certain goods, commodities, or services. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy” (Malkiel, 2012). In this way, the reader can come to understand that the overall strength and investment potential that an individual is able to experience is directly linked, and in some way correlated, to the Specter of inflation. Before delving any further into this issue, it must be understood that although certain investment concerns are only faced during key times, inflation is a very real and present threat that faces each and every investor; regardless of when or where they might be investing their money. Stocks, bonds, futures, and any other type of investment is prone to being affected by the inflation rate that may be experienced within any particular currency. As a function of discussing this to a more full and complete degree, the following analysis will engage the reader with a broader understanding of the book entitled: A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing. As the text indicates, the inflation rate, at least in real terms, is measured by a litany of different factors within the economy. However, perhaps the most effective measurement that inflation is with regards to tracking the price of certain commodities that are commonly consumed by the average individual. For instance, inflation can be effectively understood year-to-year by analyzing the growth in the price of commodities such as the gallon of gasoline, a gallon of milk, a loaf of bread, and other stable requirements that both rich and poor must have in their daily lives. Naturally, more complex theoretical interpretations and equations exist with regards to inflation; however, for purposes of understanding, the text specifically draws upon the example of necessitated commodities. Yet, with this being understood, it must also be understood that other measurements of inflation are engaged by economists. One of the more common forms is with regards to CPI (purchasing power index). Yet another is with regards to measuring “core inflation”. Core inflation is different than reported inflation due to the fact that it excludes food and energy prices. In such a manner, the economist argued it is the more relevant measure of inflation. However, it must be understood that the average investor is not an individual that is capable of tracking PPI or “core inflation”. By the same token, the average investor is not an individual that will be able to engage in a broad or overarching level of analysis based upon the cost of commodities or basic services. Likewise, the text encourages the investor to utilize the statistics and measurements that are provided within the economy as a means of determining the overall year-to-year inflation rate. Although it is of course somewhat dangerous to rely upon the statistics of others as a means of fabricating one’s own investment strategy, any other form of measurement could not be more effective due to the fact that even PhD economists disagree with the manner through which inflation should be understood, measured, or represented. Firstly, the text in question illustrates the fact that inflation does not impact upon all investments equally. Although it most certainly does have an impact on a particular type of investment, regardless of what type that might be, certain categories of investments are disproportionately affected by inflation as compared to others. Secondly, the text also illustrates the fact that returns on investment can oftentimes be overstated. For instance, the reader can consider a situation in which unnaturally high inflation, during a specific period of time, would allow for a firm/organization/corporation to exhibit an especially high profit, yield, or growth ratio within the same time period. This is the direct result of the fact that the currency is inherently less valuable than it was during the prior unit of measure; therefore allowing a higher increase of seeming “profitability” to be reflected. The overall importance of this particular understanding has to do with the fact that investors must continually be cognizant of the impact that inflation can have upon the value and key decisions that they base their investing upon. For instance, an individual that must attain a certain percentage yield within a given period of time will have their projected investment return diminished by higher-than-expected inflation. Unfortunately and all too often, investors overlook inflation and merely assumed that they have earned in the face of value return on investment as compared to what they initially put forward. Further, another salient issue that is oftentimes not considered by investors is whether or not the inflation itself was the reason for the increase in terms of “profitability” that their specific investments were able to yield. As can readily be noted, this creates something of a chicken and egg scenario; whereby the investor is not aware of whether or not the firm has earned a high level of revenue did fact that it has been successful or whether or not inflation rates are ultimately the corresponding reason behind the increase in profitability that has been noted. Furthermore, in order to determine this, the investor must be forever vigilant and aware of the fact of what inflation is doing to the way in which inflation rates can affect the performance of their respective investments. As with any investment bias, the text in question encourages the reader to engage this issue as a means of determining whether or not their investments are truly performing at the level that they are expected and required. Additionally, whereas each and every investor should be mindful of the impact that investment and inflation have upon one another, those that live on a fixed income, retirees, and individuals who are necessarily required to earn a certain percentage of interest upon their investments each and every quarter must be specifically mindful of the impact that inflation has upon their investments. For instance, retirees are hoping to fund their own existence by their investments must be especially aware of the inflation rates as these can decrease the overall monthly earnings that they would otherwise hope to achieve. An additional level of inference that the text to provide is with respect to the understanding that inflation is not in any way shape or form a constant. Although it does exist at each and every in of the economy, inflation itself is never stagnant and continually shifts to be either higher or lower. In this way, planning for inflation and seeking to ameliorate its impact is a very active process of the investor must take part in a regular basis. In such a way, the advice that the text provides for those investors who are interested in long-term investments, as compared to those that are interested in the short term yield, is largely the same. From the information that has been engaged, it is clear and apparent that inflation plays a powerful and definitive role with respect to investment strategy and the means through which an individual should approach their own portfolio. As such, the book in question provides the reader with an informed level of understanding concerning the manner through which investment advice should be understood in terms of the inflation rate and key decisions should be predicated upon whether or not real or nominal returns are being measured. Reference Malkiel, B. (2012). A random walk down Wall Street : the time-tested strategy for successful investing. New York: W.W. Norton. Read More