Abstract
Protecting Against Inflation - and Maximizing Yield I wish to thank Mr. Robert Puelz (1988) for his numerous complimentary remarks in his review of my book entitled Protecting Against Inflation - and Maximizing Yield. The book was intended to sensitize financial service professionals to the horrors of decreased purchasing power; to provide useful information about insurance product performance; and to provide clear information about Life of Georgia's experience with the Cost of Living policy, in the hope that other insurers will answer the challenge of inflation. I am glad that Puelz found the ideas about future financial products to be thought-provoking. However, there are a number of points which I would like to clarify. Puelz states: Although written with an fund manager in mind, this book can just as easily be understood by a novice. The book was, in fact, written for investment fund managers, but who are not professional managers themselves; persons designing financial services products; owners of some financial services products, who are expected to make their own decisions in spite of lack of professional expertise in the field (this would include owners of universal-variable plans and numerous other products); and life insurance agents and financial services professionals who find themselves in the position of discussing strategy questions with clients. Investment results have become too important to leave solely to the fund managers. I take exception to Puelz's remark: In some ways the credibility of the book is tainted by the inclusion of the chapter on That chapter reaches the optimistic conclusion that performance can overcome inflation. This is a fundamental point, making the various financial services products viable. Because of this fundamental point, and because this is a book about inflation, it was necessary to explore how performance, which might overcome inflation, could best be achieved. The chapter on investments certainly did need to be included. Mr. Puelz discusses the Theory of the Economics Series, which is at the core of my strategy. I will summarize the strategy as follows: - The business cycle can be broken down into four periods - one optimistic, one pessimistic, and two changing. Investment yields and other economic results vary remarkably from one period to another; this is especially true relative to three principle forms of investments: three month bills, long term bonds, and common stocks. To achieve the most satisfactory protection against inflation, this variation must be understood and used. Various trading strategies are considered; the one recommended in the book is the Prudent Mixture Strategy. Any trading strategy depends on determination of economic period. The book suggests the theory of underlying mood as one means of determining economic period; this is a controversial suggestion which might just turn out to be correct. Puelz apparently has difficulties with the efficiency implications of the theory. The Efficient-Market Hypothesis is often described and research by financial writers, but not all agreed with it. Farrell (1983), for example, after a thorough discussion of the hypothesis, states: There is opportunity for managers to develop superior insights with the potential for above-average performance. I myself disagree with the efficient market hypothesis because of long observation of the fact that fund managers, when faced with the same set of circumstances, do not al take the same course of action; their courses of action can differ very widely. Puelz also has difficulties with the underlying mood theory. He states: no doubt psychiatrists knowledgeable in projectionism would have certain arguments against the accuracy of a single investor's measurement of the state of social psychology. The underlying mood theory was developed in consultation with a distinguished professor who is an authority on psychiatric phenomena, and who believes very strongly in the theory. …
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