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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214545  
Subject: Re: Influence on ROE in Investing returns Date: 10/10/2012 10:18 AM
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I don't think this is necessarily true....

I agree, it's not necessarily true for any given company.
A company with lots of debt will do better with inflation, one with net cash will do worse, and so on.
But on average across the economy inflation is a pass-through,
except at times that it's so high that the economy just plain breaks.
It's true for the "average" common or garden company.

Certainly to a first (and probably second) approximation you definitely don't need to add inflation rate to your desired ROE.
Same as earnings yield, or as a rule of thumb anything that's an instantaneous
ratio between two things rather than the ratio of prices of one thing at different times.

This is one of the main reasons it's not sensible to compare the
earnings yield on equities (which is almost completely a real rate) to
the long bond rate (which is definitely a nominal rate).
When the 10 or 30 year long bond rate minus your expectation of inflation
in the next 10 or 30 years exceeds the cyclically adjusted earnings
yield of broad equities as was the case in the late 1990s, then bonds make sense.
I bought a lot of long German bunds yielding around 6.5% back then.

Jim
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