Buffett’s lessons on how inflation “swindles almost everybody.” Add me on Instagram: michellemarki

The stock market is rejoicing in mid-August 2022 with Consumer Price Index (CPI) Inflation coming off its 40 year highs of 9.1% in June 2022 down to 8.5% in July 2022. Many stocks are up, including some big tech favorites like Alphabet (GOOGL) and Microsoft (MSFT).

Even though these companies missed earnings expectations, people seem to be piling into popular tech stocks as safe haven stocks and hedges against inflation.

According to the Wall Street Journal, the way higher than average inflation we’re still experiencing is hiding the magnitude of our economic slowdown. Total consumer/household and business spending is either flat or falling, and even grocery store spending is down over the last six months.

So I think what legendary investor Warren Buffett said this year about how inflation is swindling almost everybody is still as relevant today as it was when he first wrote about it 45 years ago in a 1977 Fortune article.

People have become bullish on “cheap” stocks lately because some believe the Federal Reserve will only raise rates by another 1% to 1.5% to a final range of around 3.5% to 3.75% by Spring 2023 before having to cut rates again. Even though stocks have been rallying since some of the June and July lows, this could be a red herring because inflation could still spell some trouble ahead.

This is because if Buffett’s inflation assumptions are “close to correct, disappointing results will occur not because the market falls, but in spite of the fact that the market rises.”

I think we’d be wise to heed Buffett because inflation is definitely a tapeworm, and even high quality businesses like Google and Microsoft have to deploy more capital and retain more earnings just to stay in place as inflation is also like a quicksand.

Responding to a 2022 Berkshire Hathaway shareholder meeting investor question asked by CNBC’s Becky, Buffett still believes that “stocks cannot keep pace with inflation, because companies cannot increase their return on equity” and also that “bonds can swindle the equity investor too.”

As most businesses require some capital to operate, Buffett said “we have forced capital investment to essentially keep in the same place.”

Buffett wrote “on balance, however, new equity flotations and retained earnings guarantee that the equity capital locked up in the corporate system will increase.”

“When prices continuously rise, the “bad” business must retain every nickel that it can. Not because it is attractive as a repository for equity capital, but precisely because it is so unattractive, the low-return business must follow a high retention policy” just to offset the effects of inflation.

As high quality businesses as Alphabet and Microsoft are, even they are increasingly retaining earnings while their Return On Invested Capital (ROIC) rates are decreasing since “inflation acts as a gigantic corporate tapeworm” and “the tapeworm of inflation simply cleans the plate.”

It’s uncanny how Buffett repeated that nobody knows what inflation rates are going to be as he’d also written in 1977 because he wrote, “if you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker—but not your partner.”

He contends that it would be great if real income per capita increased even if real investment returns were zero, but unfortunately the real GDP per capita has only increased by 2.7% from the end of 2019 until the end of 2021, compared to CPI inflation increasing by 4.7%.

Buffett’s moral of the inflation story is that “the best protection against inflation, though, still is your own personal earning bar. So your skills will not be taken away, and your money may be.”

And while it makes total sense to focus on one’s own earning power, ultimately I’m hoping that we will have opportunities to buy stocks on sale as inflation’s effects continue to play out.

Clip cited from “Berkshire Hathaway 2022 Shareholder Meeting,”

If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide:

I look forward to making more investor friends! Please like and subscribe if you learned something or enjoyed my video. Thank you! 🙂

—
Add me:
Check out my Blog:
—

Disclaimers: This content is for entertainment, information, education purposes only. Michelle is not a financial advisor and is not providing financial, investment, trading, tax advice, or recommendations. Please consult with a professional financial advisor with a fiduciary duty and responsibility if you need help in your situation. All trademarks, logos, and brand names belong to their respective owners….(read more)

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

Warren Buffett is widely regarded as one of the most successful investors in the world. With his long track record of consistently outperforming the market and amassing a multi-billion dollar fortune, it is no surprise that many investors look to him for guidance on how to navigate various market conditions.

One such condition that investors may be concerned about is high inflation. Inflation occurs when the prices of goods and services rise, eroding the purchasing power of a currency. This can have a significant impact on investment returns, as inflation can eat away at the real value of your investments over time. However, Warren Buffett has shown time and time again that he is able to adapt his investment strategy to weather any economic storm, including periods of high inflation.

One key takeaway from Warren Buffett’s approach to investing during high inflation is to focus on investing in companies that have strong pricing power. These are companies that are able to pass on higher costs to consumers without seeing a significant decline in demand for their products or services. By investing in these types of companies, you can protect your investment portfolio from the negative effects of inflation.

Another important lesson from Warren Buffett is to focus on long-term value investing rather than trying to time the market. Instead of trying to predict when inflation will rise or fall, Buffett recommends staying focused on the fundamentals of the companies you are investing in and holding onto your investments for the long term. By investing in companies with a strong track record of generating profits and maintaining a competitive advantage, you can weather the storm of high inflation and come out on top in the end.

Lastly, Warren Buffett emphasizes the importance of staying disciplined and not letting fear or uncertainty drive your investment decisions. During times of high inflation, it can be tempting to panic and sell off your investments in a knee-jerk reaction. However, Buffett advises investors to stay calm and stick to their long-term investment strategy, as this is the key to success in the stock market.

In conclusion, Warren Buffett’s approach to investing during high inflation is centered around focusing on companies with strong pricing power, investing for the long term, and staying disciplined in the face of market volatility. By following these principles, investors can navigate periods of high inflation with confidence and come out ahead in the end.