Warren Buffett has been thinking about inflation for quite a while. The famous investor who is 91 was warned about the dangers of inflation instilled into the mind of his Republican Senator father as per biographers. He has also expressed his opinion on the topic throughout his investment career.
“We’re seeing very substantial inflation,” Buffett declared at the Berkshire Hathaway annual meeting. “We’re increasing prices, and the people are increasing prices to us. It’s getting accepted.”
The cost of living for consumers rose 7.9 percentage in the month of February, compared with the previous year, which was the most significant increase in inflation in the last 40 years. Prices for used vehicles and gasoline both increased by around 40 percent.
Why is inflation an issue for investors? Inflation or an overall rise in prices, can cause you to lose purchasing power as time passes. If you are an investor, it could change what appears to be positive returns into negative when inflation is high enough. If you own a bond that earns 5 percent annual interest may seem like a good investment, but when inflation is at 6 percent then the “real” return goes negative.
How can you beat inflation? in the words of Warren Buffett
With prices rising It’s worthwhile to revisit some of Buffett’s most effective ideas for tackling the issue he once described as the “gigantic corporate tapeworm.”
1. Make investments in solid businesses that have little capital requirement
Buffett has been a long-time advocate for investing in businesses that produce significant returns on the capital that they invest into the business. In times of inflation, companies with minimal capital requirements that are able to sustain their profits should do better than those that are forced to invest more capital at ever-higher prices to keep their positions.
Buffett once compared the threat that inflation poses as “running up a down escalator.”
2. You should look for companies that have the ability to raise prices during times of high inflation.
“The single most important decision in evaluating a business is pricing power,” Buffett said to his Financial Crisis Inquiry Commission in the year 2010. “You’ve got the power to raise prices without losing business to a competitor, and you’ve got a very good business.”
If a company is able to increase its prices, it’s an advantage in times of high inflation since it is able to reduce its own expenses.
Buffett once stated that an unregulated bridge is the perfect asset to have in a world of inflation since you already constructed the bridge and the price could rise to counteract the effects of inflation. “You build the bridge in old dollars and you don’t have to keep replacing it,” Buffett stated.
3. Check out some tips
Treasury Inflation-Protected Securities, also known as TIPS is another option which is recommended by Buffett for investors worried about the rise in inflation. TIPS offers investors an interest rate fixed each year. However, it is adjusted to reflect inflation as determined by the Consumer Price Index.
4. Make the investment in yourself and strive to be the most effective in what you do
In investing in your own potential is among the best methods to keep your buying capacity as time passes, Buffett told shareholders in 2004. The most skilled doctor or attorney in the town or city gets an education which is paid for with “old dollars” but is capable of pricing their services in modern dollars without the need to learn new skills.
You can improve your resume by acquiring the latest skills via online resources or an institution in your area. The pursuit of advanced degrees are expensive, however they will also expand your skills and help you become a more valuable employee in the coming years. Enhancing your value to your employer as well as its customers will enable you to command an equal share income as time passes.
5. Stay clear of bonds that are traditional
“Bonds are not the place to be these days,” Buffett wrote in his 2020 letter to Berkshire’s shareholders. Since interest rates are still at the historic lows bonds investors could be severely impacted in an environment of rising inflation.
Buffett has stated that buying a 10-year bond that yields 2 percent is comparable as paying 50x earnings to an enterprise, with the main difference is that the bond’s earnings won’t increase.
“Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future,” said the expert. declared.
6. Limit your desires
Buffett’s business associate who is also vice chair of Berkshire Hathaway, Charlie Munger offers his own perspective for how to best deal during times of high inflation: “One of the great defenses to being worried about inflation is not having a lot of silly needs in your life,” Munger stated to Berkshire shareholders in 2004. “In other words, if you haven’t created a lot of artificial demand to drown in consumer goods, why, you have a considerable defense against the vicissitudes of life.”
For this, think about tracking your expenses with the use of a budgeting program. This will let you know the ways you’re spending your money and can assist in identifying spending sprees that aren’t quite right before they become habitual.
What do you think of gold?
Not surprisingly, Buffett has shunned gold which is believed to be an ideal hedge against inflation. People who love gold are particularly concerned about the impact of inflation on paper currency, which is which is a major concern Buffett shares. He also noted in 2011 “If you own one ounce of gold for an eternity, you will still own one ounce at its end.” In contrast, he prefers to have useful assets like real estate, stocks, or farmland which generate dividends, income, and food for their owners.
Recently, some people have pointed to cryptocurrency being the electronic counterpart of gold. However, Buffett is skeptical of them as well.
“Bitcoin has no unique value at all,” the cryptocurrency’s creator stated to CNBC at the beginning of the year 2019. “It isn’t producing any product whatsoever. You can look at it all daylong, but no Bitcoins ever appear or something similar. It’s just a flimsy idea.”
Bottom line
It’s not clear whether the current rise of inflation likely to last , or when it’s likely to begin to decrease.
If you’re worried about the rise of inflation, take Buffett’s advice. You can also own productive assets, such as top-quality companies with minimal capital requirements and stay away of bonds with low yields, which do not increase the amount of payments in line with inflation .