Warren Buffett has been thinking about inflation for some time. The famous investor who is 91 has had the risks of inflation taught to Buffett by the Republican Senator father as per biographers. He has frequently expressed his opinion on the topic throughout his investment career.
“We’re seeing very substantial inflation,” Buffett stated at the Berkshire Hathaway annual meeting. “We’re increasing prices, and people are raising prices for us. It’s getting accepted.”
The cost of living for consumers were up 7.9 per cent in February of 2022, compared with the previous year, which was the most significant increase in inflation in the past 40 years. Prices for gasoline and used cars each increased by 40 percent.
Why is inflation an issue for investors? Inflation or an overall rise in prices, can cause the loss of purchasing power as time passes. If you are an investor, it may change what appears to be an increase in return to negative when inflation is high enough. A bond that pays 5 percent annual interest may appear to be a sound investment, but once inflation is at 6 percent and you’ll find that your “real” return goes negative.
How can you beat inflation? as per Warren Buffett
With prices rising it’s worth re-examining some of Buffett’s top ideas for tackling the issue he once described as an “gigantic corporate tapeworm.”
1. Make investments in solid businesses that have little capital requirement
Buffett has been a long-time advocate for having businesses that generate good returns on capital that they invest into the business. In times of high inflation, businesses that have low capital requirements and can maintain their profits should do better than those forced to invest more capital at ever-increasing prices to stay in the game.
Buffett once compared the problem of inflation as “running up a down escalator.”
2. You should look for companies that have the ability to increase prices in times of high inflation.
“The single most important decision in evaluating a business is pricing power,” Buffett stated to members of the Financial Crisis Inquiry Commission in 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 can raise its costs, it’s the advantage of doing so during times of inflation as it can reduce its own expenses.
Buffett once stated that an unregulated bridge could be the best investment in an era of rising prices 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 the tips listed below.
Treasury Inflation-Protected Securities (TIPS), also known as TIPS is another option that is endorsed by Buffett for investors worried about the rise in inflation. TIPS provides investors with an interest rate fixed every year twice, however its principal value is adjusted to reflect inflation as determined by the Consumer Price Index.
4. Put your money into yourself and become the most effective in what you do
In investing in your own potential is among the most effective 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 has an education that is that is paid for in “old dollars” but is capable of pricing their services in dollars of today without the need to learn new skills.
Think about boosting your resume by mastering the latest skills via online resources or an institution in your area. It are expensive, however they also can help expand your expertise and help you become a more valuable employee in the near future. Enhancing your value to your employer as well as its customers will enable you to command an equal share the earnings 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 bond for 10 years with a yield of 2 percent is comparable the cost of paying for 50 times profits to businesses, the key difference is that the bond’s income can’t increase.
“Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future,” said the economist. stated.
6. Limit your desires
Buffett’s business associate who is also vice chair of Berkshire Hathaway, Charlie Munger has his own ideas on how to 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 said 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.”
To aid in this, you should consider keeping track of your expenses using the use of a budgeting application. This will let you know the way you’re spending your money, and could assist in identifying spending sprees that aren’t quite right before they become routine.
What is gold?
In addition, Buffett has shunned gold which is believed to be an excellent hedge against inflation. Gold enthusiasts are particularly worried about the effect of inflation on paper currency, which is which is a major concern Buffett shares. However, as he stated in 2011 “If you own one ounce of gold for an eternity, you will still own one ounce at its end.” He prefers to have productive assets like real estate, stocks or farmland which generate dividends, income, and food for their owners.
Recently, some people have pointed to crypto currencies being the electronic counterpart of gold. However, Buffett is skeptical about them too.
“Bitcoin has no unique value at all,” said he stated to CNBC during the year 2019. “It does not produce any product whatsoever. It’s possible to stare at it all daylong, but no Bitcoins ever appear or anything similar to that. It’s just a flimsy idea.”
It’s not clear whether the current rise of inflation likely to last , or when it’s likely to begin to fall off.
If you’re concerned about the rising inflation, you should consider Buffett’s advice and investing in productive assets, such as good-quality businesses that have low capital requirements and stay away of bonds with low yields, which do not raise the rate of return in conjunction with inflation .