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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era
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To: Freedom Fighter who wrote (1464)3/15/1999 12:40:00 PM
From: Freedom Fighter  Read Replies (1) of 1722
 
Porc, my response wasn't clear.

>> Since
these replacement costs always fall in the long run (the inverse of the fact that the
productivity of assets always rise in the long run) then inflation adjusted stock market
prices should have been falling for the past 200 years, instead of rising.<<

> The increase in the value of both replacement cost of total assets and market value of
stocks is related in part to inflation and in part to the reinvestment of profits.

Let's say a $5 dollar hammer generates 50 cents. If 10 years later it costs $10, hopefully
it will generate $1. If I have replaced the $5 dollar hammer from depreciation and
profits and bought a second one from profits I now have $20 worth of assets generating
$2. This is an increase in assets and most likely market value of stock. There are
accounting issues here for depreciation, but that is another topic that I would like to save
for another time since we've covered that ground already.<

Absent inflation, there is new money being supplied to the system that equals the increase in productivity and/or profit. So absent inflation I would have two $5 dollar hammers. A total of $10 vs $5 and a higher income stream.
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