What “Return” Really Means in a World of Weak Money
How inflation distorts our perception of returns — and why real wealth is built on value, not numbers.
Introduction
We often talk about returns as if they were simple — numbers on a chart, percentages on a statement. But in a fiat world, those numbers are measured in a system that quietly erodes their meaning. Real wealth isn’t created by nominal gains; it’s created when productive capital delivers lasting value, independent of monetary illusions. This article takes a closer look at what “return” truly represents once you strip away inflation, credit expansion, and accounting conventions — and why every serious investor should keep one eye on real value, not just price action.
On real returns
We talked about achieving high returns from investment. But what does that really mean? A real return exists only when genuine wealth is created — when productive capital yields more goods and services of actual value.
Since in our times “hard” money is gone, most economic calculations — especially those in the capital markets — are conducted in soft, fiat currencies governed by Keynesian principles of regulation and monetary expansion. Company reports, balance sheets, and ratios are all denominated in USD, EUR, GBP, or other such units of account. Consequently, your returns are expressed in nominal terms, while the true loss of purchasing power remains hidden in the background.
That’s why a conservative approach to inflation is essential — better to slightly overestimate it than to be too optimistic. A simple formula keeps things grounded:
real return = nominal return – (conservatively estimated) inflation
I do realize this is a simplification, but I intentionally keep things simple — it’s far more important to be roughly correct than precisely wrong. What one needs to understand is that inflation, like returns, compounds over time. And inflation is the true enemy of money’s value.
This perspective helps us stay anchored in what really matters: the preservation and growth of real wealth and value, not just nominal figures.
But, financial statements and the common metrics used to evaluate stocks do not adjust for inflation directly. Its effects instead appear indirectly, and only to some extent — in interest rates, financial costs, or the weighted average cost of capital (WACC) and other factors.
So when we talk about returns in the stock market, we mean those obtained through stock price appreciation, dividends, and the effects of share buybacks or dilution, all expressed in nominal terms, without automatic correction for inflation or shifts in the cost of capital.
At the end of the day, however, a company’s stock price ultimately follows its earning power. Over time, markets tend to reflect the trajectory of a business’s profits — not perfectly, but closely — with short-term fluctuations driven by changing expectations about the future. Part of these profits may reach shareholders as dividends, a direct, realized return. Another part may be used for buybacks, reducing the number of shares and increasing each remaining investor’s claim on future earnings. Together, price appreciation, dividends, and buybacks form the total return to shareholders — a reflection of how effectively a company transforms its earning capacity into lasting, real-world value.
What we do lastly — quietly, in our own minds — is take the total return and make it a little more real. We look at our compounded return (the growth produced by price appreciation, dividends, and buybacks — essentially, our total-return CAGR) through the lens of average (compounded) inflation over the investment period. We don’t report this anywhere; it doesn’t appear in our personal balance sheet. Yet keeping it in mind gives us a close-to-real sense of the actual wealth created — the kind that reflects genuine purchasing power. It would be better to measure wealth against some form of hard money — gold, or perhaps Bitcoin — but that’s a discussion for another time. Perhaps in the end, all we’re really doing is measuring shadows on the wall — and trying to glimpse the light of real value behind them.
