Warren Buffett’s Advice on Investing During Inflation

Photo of Warren Buffett, Chairman and CEO of Berkshire Hathaway, retrieved from CNBC.

With inflation currently at a 40 year high (AP News), what can we as stock investors do to maximize profit at this time?

United States Inflation Rate

United States inflation is currently at a 40 year high at 9.1%. (Trading Economics)

Well, here is a breakdown of what Warren Buffett investment philosophy and strategy says to do:

1. Invest in businesses that has enough power to raise prices to mitigate the effects of inflation

We must invest in businesses that have a competitive advantage that gives it pricing power. With price power, it's able to raise prices with inflation.

It is also important to consider the customer-base of the business when considering the pricing power. For instance, high-end brands have an easier time to raise prices due to their higher-earning target market.

2. The business does not require a huge amount of capital to support inflationary growth, thus deriving the benefits of CAPEX

The idea is that the company has major Capital Expenditure in yesterday’s dollars, prior to the inflation. They are able to use the CAPEX from the past to generate revenue, rather than having to spend more in today’s inflated dollars to generate revenue.

3. “There is no silver bullet while investing during high inflation”

It is difficult to invest during inflation, Buffett does not deny this. There is no easy way to go about it, but we must pursue long term value. 

Some more information on Buffett’s philosophy and strategy:

Philosophy

Buffett’s philosophy includes buying stocks in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth. This can all be broken down into 3 categories: management tenets, financial tenets, and value tenets. (Investopedia)

• Management tenets

Management tenets analyze records of a company’s higher-ups in order to determine if profits have historically been invested back into the company, or if they’ve redistributed funds to back shareholders in the form of dividends – Buffett favors the former. This tenet places high importance on transparency. Buffett seeks out companies who make innovative strategic decisions, rather than copying another’s tactics

• Tenets in financial measures

Tenets in financial measures focuses on low-leveraged companies with high profit margins, and prizes the importance of economic value added calculation through estimating a company’s profits. Although high leverage leads to high returns, it exposes investors to huge potential losses.

• Value tenets

Value tenets estimate future earnings, then discount them back to present-day levels. In term, this Ignores short-term market moves, and focuses instead on long-term returns. Buffett looks for an economic “Moat,” or something that gives a company a clear advantage over others and protects it against the competition.

Investment Strategy

Buffett’s investment strategy heavily follows the Benjamin Graham method of value investing, as he looks for securities whose prices are unjustifiably low based on their intrinsic value. He examines companies as a whole, rather than focusing on supply and demand of the stock market.

In addition, he starts with the perspective of shareholders, who, without a doubt, do not want to lose money, and looks at potential downside for any investment in terms of capital losses, and not Market-to-Market volatility. (Investopedia)