Mental Models discussed in this podcast:
Inflation
Mr. Market
Purchasing Power
Pricing Power
Discount Rates
Risk Premium

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You can find out more information by listening to episode 11 of this podcast.

Show Outline
The full show notes for this episode are available at

What is inflation?
Inflation has many definitions depending upon your source and audience. However, for investors only one definition matters.

Inflation is the loss of purchasing power of your money over time.

Inflation Risk
Key Aspect #1: The simple presence of inflation requires an investor to profitably invest their money at a rate of return higher than inflation. Therefore, inflation risk, on the one hand, can mean that investors have a constant need to invest otherwise their money loses value.

Key Aspect #2: Inflation is a critical input to many theoretical investment pricing models. Whether explicit or implicit, investors around the world make assumptions about future inflation when choosing what investments to make. If future inflation does not match these expectations substantial changes in the price of securities (including stocks and bonds) may occur.

Key Aspect #3: Companies price their products and services in nominal currency. (This coat costs $100 USD or $100 EUR). They don’t price goods in real terms, like “4 hrs of labor” or “8 hrs of labor.” As inflation occurs some companies will be able to raise their prices. Others won’t be able to.

This means that companies will generally fall into 3 categories in the presence of inflation:

Category 1: As their costs rise, the company is unable to pass on these costs to their customers. Therefore, the company becomes less profitable. Examples: Commodity companies

Category 2: As their costs rise, the company is able to pass on these costs to their customers. Therefore, the company can maintain profitability in the face of inflation. Examples: Media companies, TIPS, NACCO

Category 3: As their costs rise, the company is able to raise their prices at a rate faster than inflation. Therefore, the company can become more profitable during periods of inflation. Sometimes known as Defense Companies, High-Quality Companies, or Blue Chips. Examples: Tobacco Companies, Banks,

Category 1 & 2 are much more common.

How to manage Inflation Risk

In times of high inflation, be aware that low inflation may return in the future. You can sometimes lock in high rates of return on low-risk investments when others only anticipate ever-higher inflation forever. In times of low inflation, don’t forget that high inflation is always a possibility. Position yourself to own companies that can thrive in both low and high inflation. Don’t simply latch onto those companies that only thrive in low inflation environments. Pricing power is critical to successful investing. Summary: Your goal as an investor it to earn an acceptable return on your investment capital over your investing lifetime. The very minimum must be to at least earn a return that exceeds the rate of inflation. Ideally, you’ll earn a risk premium above inflation. In today’s investing environment, low inflation is the accepted norm and many predict low inflation far into the future. Perhaps one of your biggest opportunities is to, therefore, find and invest in the subset of companies that will thrive when high inflation returns. When the rest of the market gets hammered, your investments would be safe….(read more)

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

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HOW TO INVEST IN SILVER: Silver IRA Investing

Inflation risk, also known as the loss of purchasing power, is a concern for many people, especially those who are saving for retirement or investing for the future. Inflation erodes the value of money over time, making it essential to manage this risk in order to protect your financial well-being. Here are 5 ways to manage inflation risk and preserve your purchasing power.

1. Invest in Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) are a type of government bond that is indexed to inflation. The principal amount of TIPS increases with inflation and decreases with deflation, ensuring that the purchasing power of the investment is preserved. Investing in TIPS can help protect your portfolio from the effects of inflation.

2. Diversify Your Portfolio: Diversification is key to managing inflation risk. By spreading your investments across different asset classes such as stocks, bonds, real estate, and commodities, you can reduce the impact of inflation on your overall portfolio. Different assets perform differently in response to inflation, so having a diverse mix of investments can help offset the effects of rising prices.

3. Invest in Real Assets: Real assets such as real estate, commodities, and natural resources tend to perform well in inflationary environments. These assets have intrinsic value that can increase with inflation, making them a good hedge against the loss of purchasing power. Investing in real assets can help preserve your wealth and protect against the erosion of value caused by inflation.

4. Consider Dividend-Paying Stocks: Investing in dividend-paying stocks can be a way to mitigate inflation risk. Companies that pay consistent and growing dividends can provide a source of income that keeps pace with inflation. Dividend payments can help offset the effects of rising prices, allowing you to maintain your purchasing power over time.

5. Stay Informed and Adjust Your Strategy: Monitoring inflation trends and adjusting your investment strategy accordingly is key to managing inflation risk. Stay informed about economic indicators, monetary policy, and inflation expectations, and make adjustments to your portfolio as needed. Being proactive and adaptable can help you stay ahead of inflation and protect your purchasing power.

In conclusion, managing inflation risk is an essential part of preserving your financial well-being. By investing in inflation-protected securities, diversifying your portfolio, investing in real assets, considering dividend-paying stocks, and staying informed and adaptable, you can mitigate the effects of inflation and protect your purchasing power. Taking these steps can help you maintain the value of your savings and investments despite the erosive effects of inflation.