Terrorism, Swine Flu, and Beating Today's Market

After the 9/11 terrorist attacks, air travel plunged for obvious reasons. People were scared. Flying, they presumed -- perhaps rightly so -- was now more dangerous.

As air travel decreased, auto travel increased. But since the fatality rate of auto travel is higher than air travel, the influx of drivers had mortal consequences. A 2005 study by a team of Cornell University professors concluded that the surge of auto 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 the number of healthy people visiting the ER 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. President 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 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 fall, the Federal Reserve has 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. Treasury Inflation-Protected Securities (TIPS) are another, but you're resigned to the Department of Labor's definition of inflation, which might not reflect the real deal, and the protection they generate is taxed every year. A third way is buying companies with moats 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:

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. The United States has a 31% obesity rate, a 29% high school dropout rate, and a divorce rate approaching 50%. 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 Inside Value 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 recommending, click here for a 30-day free trial. There's no obligation to subscribe.

Fool contributor Morgan Housel owns shares of Philip Morris International. Google is a Motley Fool Rule Breakers selection. Coca-Cola and Microsoft are Motley Fool Inside Value recommendations. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor recommendations. Philip Morris International is a Motley Fool Global Gains pick. The Fool has a disclosure policy.