Beat the next panic by turning to these seven inflation-busting stocks.
After the September 11 terrorist attacks, air travel across the globe plunged for obvious reasons. People were scared. Flying, they presumed -- perhaps rightly so -- was now more dangerous.
As air travel decreased, car travel increased. But since the fatality rate of car travel is higher than air travel, the influx of drivers had mortal consequences. A 2005 US study by a team of Cornell University professors concluded that the surge of car travel linked to 9/11 was responsible for 2,170 driving deaths -- not much less than attributed to the attacks themselves.
Stop. Drop. Panic.
Here's a similar story: A good friend of mine, an emergency room physician, noted a jump in the number of healthy people visiting the casualty department to be tested for swine flu earlier this year -- even if they had no symptoms. They just wanted to err on the side of caution. Better safe than sorry.
But how many of these perfectly healthy people were exposed to legitimate illness sitting in a hospital waiting room with coughing, sneezing, and infectious patients? I've yet to see an actual study, but intuition should tell you that if there's one place where you're susceptible to catching swine flu, it's a hospital waiting room filled with people who may actually have it.
It's an unglamorous part of being human: We have an innate urge to overreact to perceived threats, creating problems more dangerous than what we're trying to avoid in the first place. Franklin Roosevelt was onto something when warned, "The only thing we have to fear is fear itself."
Sound Familiar?
Take that thought and think about the current stock market. Despite the recent rally, the amount of fear that still consumes markets should be considered nothing less than huge.
Which isn't surprising. Things are bad, after all. But just like the aftershocks of 9/11 and swine flu, overreaction to perceived threats can morph into larger problems than we're trying to avoid.
For instance, legions of investors have vowed to shield themselves from permanently imploding stock markets by flocking to cash over the past year.
How much safety they'll find in that cash, however, is questionable. Since last autumn, the Bank of England and US Federal Reserve have dumped cash into the economy like there's no tomorrow. However necessary that was to prevent a sequel to the Great Depression, the side effects are fairly certain. As Warren Buffett recently noted, "one likely consequence is an onslaught of inflation."
Not today. And maybe not tomorrow. But don't kid yourself: Inflation will happen.
Terrorism and Swine Flu, Meet Investing
And so many investors who are trying to avoid one problem -- crashing stock markets -- are charging into an asset class severely susceptible to another, potentially more dangerous, problem: long-term inflation.
Investors who don't want to settle for the wealth-destroying nature of inflation have a few options. Gold is one, but you have to hope you get its price, fraught with speculation, correct.
Index-linked gilts are another, but you're resigned to the RPI's definition of inflation, which might not reflect the real deal, and the semi-annual coupon payments are taxed every year.
A third way is buying companies with competitive advantages so powerful they can raise prices in the face of inflation.
You can probably guess which option I'd encourage.
Great Companies, Great Power
Companies that can effectively raise prices with inflation are few and far between, but they do exist. Here are a few I can think of:
| Company | Inflation Hedge |
|---|
| British American Tobacco (LSE: BATS) | Sells an addictive product. |
| Diageo (LSE: DGE) | Pricing power, based on consumer awareness of brand names. |
| BSkyB (LSE: BSY) | Being dominant player in pay television provides pricing power. |
| Unilever (LSE: ULVR) | Premier brand names and a dominant position in the market. |
| Tesco (LSE: TSCO) | Sells essential goods. Dominates the industry. |
| Cadbury (LSE: CBRY) | Being second to none in the global confectionery market provides tremendous pricing power. |
| BP (LSE: BP) | Sheer size, huge international exposure, sells oil -- an inflation hedge itself. |
Add It All Up
Hoarding cash can feel great right now. But you have to remember: We're terrible at shoving aside short-term emotions for what's ideal long term. Our desire to pounce on what feels right in the short run is often stronger than our ability to do what's optimal in the long run. Investing decisions are no exception: If you want to make money after inflation over the next many years, cash ain't gonna get you there.
Our team at Motley Fool Champion Shares is tackling this issue head on, finding bargain companies with competitive advantages that allow prices to be raised in the face of inflation. To see what we're currently recommending, click here for a 30-day free trial. There's no obligation to subscribe. You can also find more details about how the service works here.
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who does not have an interest in any of the companies mentioned in this article.
