Q. I must be living in a world that's different from most financial experts and those in Washington. Today, all the news is about the "moderate inflation" we're   experiencing.   I no expert, but from my point of view inflation is proceeding at a very rapid rate. There is little I do that doesn't cost more than it cost last year, last week and even yesterday. Gas is up, baseball tickets are up, cable goes up with regularity, eating out is up maybe 30% from past years, and every time I buy a car it costs more.

What are your views on current inflation and what will be the effect on stocks and investment strategy?

---W. A., by e-mail from Dallas.   

A. You are not alone in thinking that the current Consumer Price Index does not reflect what you, or most people, are experiencing. Bill Gross, the bond market guru at PIMCO has expressed his belief that the CPI is being manipulated through "hedonic adjustments"--- the adjustment of prices to reflect changes in quality and durability. (You can read his comments on the PIMCO website at: http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_Oct_2004.htm)

In fact, I'm not convinced. Without hedonic adjustments, we would have no way to reflect real improvements in products.

Automobile prices are a good case in point. The average car sold today is very different from the average car of 15 or 30 years ago. Recently, for instance, I rented a car in Burbank California. I was shocked to discover that it had wind-up windows. (How quaint!) Today, we take power windows for granted. We also take automatic transmissions, traction control, multiple air-bags, power steering, disc brakes, ABS brakes, fuel injection, radial tires, and a multitude of other improvements for granted. All of them enhance the quality of automobiles and increase the price.

Would you give all this up if you had a choice?

You can test this for yourself by driving, say, a restored 1970 Volkswagen and asking yourself whether you would want to own it given its lack of power, poor brakes, slow speed, poor heating, lack of air conditioning, etc. My bet is that most of us like the improvements on new cars and willingly pay for them--- even though they "inflate" the cost of a new car.

As a practical matter, no single index will ever reflect what each of us experiences because we all make different spending choices. The cost of movie tickets, for instance, has been rising--- but millions of people haven't been to a movie theater in years because they rent their movies and watch them at home. When they do this, the cost per person is lower than a movie theater ticket. Better still, they don't have to sit next to a stranger wearing an open armpit t-shirt.

We'll know that inflation is a real threat to our investments, the economy, and our standard of living when our total purchasing power starts to decline. So far, that is a recurrent worry. But it is not a reality. When, and if, our collective purchasing power declines, we'll need to invest more defensively, buying stocks whose products aren't affected by recessions or high inflation.


Q. When do you NOT sell a stock? If you can't be helped by using the loss to offset gains on your taxes, how long do you hold a stock? We still have a lot of those 'hot' NASDAQ stocks that are down. How long do you hold on to one of those things before biting the bullet and switching to index funds? I know you can't see into the future, but I just need a bit of direction.

  ---I.B., by e-mail


A. Warren Buffett says his favorite holding period is "forever." The difference between Mr. Buffett and most investors is that he does a lot of homework before he invests. He has a pretty good idea of what the stock is worth. He sells when, and if, his assessment of value changes.

If you don't have a strong, well-researched opinion about a stock you shouldn't buy it. And if you own it, you should sell it. Without confidence, the only thing it can do is add anxiety to your life.

Bottom line: Sell your individual stocks and buy an index fund. Hold the index fund as close to forever as possible.