Fortune article: “How Inflation Swindles the Equity Investor”

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Warren Buffett, the legendary investor and Chairman of Berkshire Hathaway, has been known for his insightful investment advice over the years. When asked about the best business to own during inflation at the 2011 Berkshire Hathaway Annual General Meeting (AGM), Buffett had some interesting insights to share.

Buffett began by acknowledging that inflation is a very real threat to businesses and investors alike. He noted that high inflation rates can erode the purchasing power of money and lead to a decline in real earnings. However, he also pointed out that some businesses are better equipped to weather the impact of inflation than others.

Buffett emphasized that the best businesses to own during inflation are those that have “pricing power.” In other words, these businesses are able to raise prices in response to inflation without losing customers or market share. This allows them to maintain their profit margins and even increase their earnings in the face of rising prices.

According to Buffett, businesses that have pricing power can be found in a variety of industries. For example, he cited the example of Coca-Cola, which has been able to raise prices steadily over the years without losing its loyal customer base. Similarly, brands like Procter & Gamble and Johnson & Johnson have pricing power in their respective markets.

Buffett also emphasized the importance of owning businesses that have a strong competitive advantage. He noted that companies with a “moat” – meaning a sustainable competitive advantage – are better positioned to maintain their market share and pricing power over the long term. This is because they are able to fend off competitors and maintain their dominant position in the market.

Finally, Buffett cautioned investors against owning businesses that have a high dependence on raw materials or energy. These businesses are more vulnerable to the impact of inflation, as rising input costs can eat into their profit margins. Instead, he advised investors to focus on businesses that have low input costs and high margins, such as software companies or service providers.

In conclusion, Warren Buffett’s advice on the best business to own during inflation is simple yet insightful. Investors should focus on businesses that have pricing power, a strong competitive advantage, and low input costs. By doing so, they can protect their investments against the impact of inflation and position themselves for long-term success.