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Warren Buffett's Secret To Fighting Inflation

There are nearly an infinite number of ways you can be separated from your money. You can lose it investing, you can overspend and you can even run your pants through the wash with your wallet still in them. Fortunately, these are all avoidable situations but one loss of money people think they have zero control over relates to inflation. Chances are good you’ve been hearing a ton about inflation lately and you may be wondering how it will affect your wealth going forward. Well, for most people, rising inflation will absolutely slow down their path to financial success but, fortunately, you don’t have to be one of those people thanks to our old pal, Warren Buffett! As such, I want to share with you what Uncle Warren deems to be the most important factor in combating and overcoming inflation, so let’s dive right in!

There are certain things I don’t like to assume. For instance, I don’t like to assume people’s gender, nor do I like to assume that people find me attractive — which they probably do. Another thing I wouldn’t want to assume is that you are aware of what inflation truly is so let’s get that out of the way first before we move on to how Warren Buffett recommends we fight one of the biggest threats to our money!

Inflation is defined as a sustained increase in the price of goods and services which in turn reduces the purchasing power of the money you have. Examples of this are when you go to the store and milk and bread have now shot up in price or when you take your girl out for dinner and the prices make your eyes pop out of your head more than usual. In short, your money doesn’t go as far and that’s a big issue!

The question people often ask me, and one you may have yourself is, do prices really need to ever go up? I don’t know about you but I prefer to pay less when I go to the store or shop online and I’d be willing to guess that you feel the same. Well, inflation is a by-product of three financial phenomena with the first being demand-pull inflation.

Three Forms of Inflation

Demand-pull inflation takes place when more money becomes available, which we’ve seen recently through the printing of trillions of dollars in the United States in the form of stimulus checks and other governmental programs. In effect, people have more money to spend and this increases demand for goods of which supply can not always be met which drives up prices.

Then there’s cost-push inflation which is the direct result of production costs rising. Think about how limited natural resources like lumber have been over the past year and how their rise in costs have affected the price of homes in the real estate market. I know personally I’ve had a lot of friends simply get priced out of the market because even the most basic of homes these days are outrageously expensive. This rise in prices is not only being driven by increased input costs but people’s willingness to overpay just to be able to get into the market.

Finally, there’s built-in inflation. Kind of like how you expect to pick up the tab on a first date, you also expect your salary to rise as the cost of goods around you go up. However, of course this is a double-edged sword because if all of a sudden your employer has to pay you more, then in turn, prices will go up which will prompt people to ask for more money again and the cycle repeats itself into perpetuity. In fact, this is one of the main reasons the price of goods and services will always rise over time.

As you can see, there are a lot of reasons why prices go up and let me tell you they are all unfortunate to experience. Now that you know what types of inflation exist, one thing you must be acutely aware of are the levels in severity of inflation. You see, not all forms of inflation are created equal and generally the more aggressive inflation is, assuming your assets do not rise in equal proportions, will make you poorer over time. So, to be able to successfully combat inflation, you must first be able to identify when you’re in its presence.

Four Speeds of Inflation

Generally speaking there are four speeds at which inflation works and the first is creeping inflation. No, not the creeping you do on Facebook to see how your high school ex is doing 10 years later. This creeping takes place when inflation is mild and less than 3% a year. Generally, the Federal Reserve uses a 2% inflation target and as such we typically operate in a state of creeping inflation whether we realize it or not.

Next, there’s walking inflation. Why creep when you can walk right? Walking inflation takes place when inflation rates are between 3–10% and when this level of inflation takes place, people start stocking up on goods to avoid future price rises. This is when you see shows like Hoarders come back in style as people can feel better about themselves for having bought 10 packages of toilet paper by watching people who are worse hoarders than they are. Now that you understand how inflation works, you’ve probably come to realize that as people start driving up demand for goods, this only makes inflation worse which is why walking inflation is generally seen as a slipper economic slope.

Next up, we have galloping inflation. This is where inflation is 10% or more and this is where trouble really starts to take place. At this point, prices are rising at a rapid pace and people are feeling a major pinch in their pockets. In fact, with galloping inflation, it gets so bad that people will start to question the decisions of their political leaders for letting their economies decline in this way and even foreign investors begin to lose interest in these markets. Now, if you’re under 40 and live in the West then you have yet to live through this aggressive of inflationary times but I’m sure if you asked your parents they would tell you how punishing it can be living with double digit inflation.

Finally there is hyperinflation. This is where prices skyrocket by more than 50% a month. Sometimes when I see my credit card bill at the end of the money, I wonder if we are in a state of hyperinflation but then I realize that perhaps I got a little too crazy at the bar that month. Bad jokes aside, hyperinflation is the ultimate form of inflation punishment however it rarely takes place. In fact, the last time the US experienced hyperinflation was during the civil war so while nothing is impossible, chances are you won’t experience hyperinflation in your lifetime.

Now, at this point, you probably know more about inflation than 99% of people on Earth which means two things. First, you should be adding this fun fact to your Tinder bio ASAP and second, you’re now ready to learn Warren Buffett’s secret to battling inflation.

You probably won’t be surprised to learn that to fight off inflation, you will be required to invest. I mean, what else would you expect one of the world’s most prolific investors to suggest, right? However, there’s a right way and a wrong way to go about this so let me share how you should proceed.

The Solution

As per Warren Buffett, the single most important criterion when investing during inflationary times is the pricing power of the companies you invest your money into. Now, for those who are unfamiliar, pricing power describes the effect of a change in a firm’s product price on the quantity demanded of that product. Basically, it’s how much can a company change its product’s price before people stop buying it as much as they already are.

If you took microeconomics in school then you probably learned this concept as price elasticity and honing in on companies that are very price inelastic is key to proper inflationary investing.

For instance, if inflation is rising and people are feeling the pinch in their wallets, they are still going to have to drag their butts to the pharmacy to get their prescriptions or the grocery store to buy food. On the other hand, people will likely buy sports cars and travel when their disposable income shrinks because of inflation.

Now, as you would expect, Buffett doesn’t just talk the talk when sharing this important advice but he walks the walk as well. What I mean by this is that as talks of inflation were at their peak back in the summer of 2021, Buffett ensured that his company, Berkshire Hathaway’s money was placed in companies with solid pricing power. One of these companies was Apple.

Now, you’re probably thinking to yourself, “are people really buying IPads and earpods when inflation is rising?” and the answer to that question is a resounding yes. Even though Apple produces consumer goods, their cult-like following never miss a beat when it comes to acquiring their new and existing products and won’t jump ship even if Tim Cook decides to raise their prices. This is price inelasticity in action and is why during the summer of 2021, Berkshire had over $135 billion invested in Apple.

In fact, a lot of businesses that you wouldn’t expect to be able to raise their prices have amidst these inflationary times like McDonalds and Starbucks. As it turns out, people need their fix of Big Macs and highly caffeinated drinks more than they thought.

Now that you understand how certain businesses separate themselves from the pack during times of inflation, let me briefly share with you what I would see as a viable strategy for investing during this time and the one mistake you must avoid at all costs.

When inflation begins to rise, it’s time to start funneling your disposable income into companies that can weather the storm. According to a recent study conducted by Swiss Bank UBS, companies that are the most resilient during inflationary times operate in sectors such as consumer staples, communication services, IT services, Healthcare and Real Estate.

If you think about these sectors for a second, each one logically makes sense as to why they can afford to raise their prices regardless of the state of inflation. For instance, people aren’t going to stop using their cellphones just because the cost of bread at the store is rising.

Alternatively, people will still need a roof over their heads which those in the real estate business very well understand. In fact, even outside of inflationary times, many of these sectors will make for prudent investments but they become particularly valuable during the present times we are in.

Now onto the mistake that you must avoid. Besides investing in companies within these fields that you have not done proper research on, the worst mistake you can make during inflationary times is to simply let your money sit idle in the bank. Well, no actually the worst thing you can do is go out and rack up debt by overspending but I assume you’re smart enough not to do this regardless of the state of inflation we are in.

The reason that saving money during times of high inflation is so crippling is because banks these days literally give you nothing in return for depositing your money into their accounts. Most savings accounts these days pay you 0.05% interest or less while they turn around and lend out your money at exorbitant rates of interest.

If you ask me, not investing during periods of heavy inflation is like failing 5th grade over and over. While all your friends are making progress and moving on with their lives, you’re stuck in the same seat in class year after year, getting older but not getting any smarter. I don’t know about you but going through 5th grade once was enough and if you feel the same then make sure that as inflation rises, you are investing in companies with enough pricing power to weather the financial storm!

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