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By Jason Stipp | 08-17-2010 11:50 AM

Larson's Four Picks for Inflation and Deflation

The Morningstar StockInvestor editor suggests one pick for fighting inflation and three stock ideas that should hold up well if deflation hits.

Jason Stipp: I'm Jason Stipp from Morningstar. With a lot of market watchers, both hedging for inflation and deflation out there in the marketplace, Morningstar's Paul Larson, Editor of Morningstar's Stock Investor, recently joined us to talk about how you could position a portfolio for both of these uncertainties. He's here today to put some specific ideas behind his advice that he gave last time.

Paul, thanks for joining me.

Paul Larson: Thanks for having me again.

Stipp: So, first question for you, let's just review some of the things you said last time on the inflation and deflation debate. There is one thing that we can sort of agree upon, even if you can't predict which one is going to happen. What is that?

Larson: Well, it is that the tail risk is much larger than it was that the middle part of the probability curve of the bell curve is much smaller and that the tails on that distribution, both for inflation and deflation, the market is worried about both of those things right now.

Stipp: So what they are saying is that the moderation that we see in inflation, there people are expecting less of that and more of one or the other going forward.

Larson: Exactly, that the pendulum is going to swing much more greatly than it has in the past two decades.

Stipp: So last time around you said that looking at wide-moat stocks is a good way to prepare your portfolio for these uncertainties, even if we don't know what's going to happen. So you're going to give us some specific investment ideas behind that. Let's start with the inflation side; there's a lot of folks that have lots of different options for investing and trying to hedge against inflation. What are your ideas?

Larson: Right. Well, I think one of the key things that we want to get across is if you believe that we are going to head into a period of high inflation that you don't necessarily have to go out and buy gold coins to have a good investment.

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