The argument was that currency inflation incents people to make investments (even low-risk investments) which appear to be profitable, but are actually below average and reduce economic output rather than contributing to growth.
What do you mean by "below average?" Under any economic condition, about half of investments will be below average. If that average level does not provide the level of real growth that people would like, the problem is not with monetary policy, it is, as I mentioned before, a problem with the quality of investable options.
And for purely financial investments, remember, for every buyer, there is a seller and one of them is wrong. That's a joke of course, but when the investment is real, say, to build a factory or not, the actual return is in the widgets that come out of the completed factory - it doesn't actually print dollars. And the real value of those widgets, and therefore the real return on the factory and the real contribution to economic growth and standards of living, is independent of the monetary expansion or contraction that has occurred and is entirely dependent on the relative value of those widgets to other widgets in the economy (including the ability of people to pay for them) at the time they hit the market.
That's never the best deal you can get, because in the absence of price inflation or deflation you can stuff your money in a mattress and get a guaranteed 0% real return
You and I can do that, but Bill Gross, Calpers, and Temasek can't, and those are the marginal investors that set the order book, not you and me.
The really interesting case doesn't even involve negative returns; that's the one where price inflation and currency inflation are not at the same rate. For example, if technological progress and/or improvements in economic efficiency would naturally lower prices by 2%, but there is a 5% increase in the currency supply over the same period. The net result is 3% price inflation, but an investment with a 5% nominal return, while higher than price inflation, is really a malinvestment because it's not producing any real improvement on the resources consumed—the 5% is entirely due to currency inflation—in a time where the average investment is giving 2% real returns. The 2% increase in purchasing power is due to other investments which led to a general improvement in the state of the economy, not that particular investment, which is dragging down the average.
This is where you really have to take care about what kind of investment you are talking about. If this is a financial transaction, where I invest $100 and get $105 next year, it's not malinvestment because no real resources are being consumed. Trader A wins and trader B loses, with a second order effect that trader A probably gets to risk more money on his positive supply shock bet and trader B gets less money to risk on his low real return bet.
But if you are referring to a real investment in capital or labor, then I disagree with your premise that you get a nominal return on those. A capital investment, or a worker, can't make you $105 worth of cash; they can only make you goods or services which you then sell for, say, $105 cash. Note that this $105 isn't because of the 5% increase in the currency supply (unless this widget is the only thing in the economy), it's because someone is actually willing and able to spend $105 to get what you are offering, as opposed to spending that money on some other good or service that someone else is offering. So this wasn't a malinvestment - it truly is something that people want more than the 3% overall inflation rate, otherwise it wouldn't have been a $105 price.