Warren Buffett: How to Make Money During Inflation

Warren Buffett: How to Make Money During Inflation

Warren Buffett battled inflation in the late 1970s and early 1980s and also observed the long term effect consistent inflation has on consumer buying power, investments, savings, and companies expenses. Here are his insights on both investing and personal finance during inflationary environments.

Warren Buffett Inflation Advice

“If we dropped $1 million dollars of cash into every household in the United States today everybody would feel very good, except the people invested in things denominated in dollars.” – Warren Buffett

The worst thing he says you can hold during an inflationary environment is the currency that has its value being inflated away by too much supply of that currency. Savings, bonds, and low or no interest money market accounts are all hurt by reduction in buying power. This is likely why we see Buffett put capital that has been on the sidelines to work in investments during inflationary environments.

Buffett doesn’t try to predict future inflation he looks at the current inflation rate and trends and makes portfolio buying adjustments while sticking to his long term value investing system.

“Unfortunately most businesses will not come out well in real terms during inflation. Their earnings may go up a fair amount overtime, but their compelled to put more and more dollars into the business just to stay in the same place. You know the worst kind of a business is one that makes you put more money on the table all the time and doesn’t give you greater earnings.” – Warren Buffett

Buffett is explaining that companies with low returns on tangible assets have trouble with return on equity as they must keep rolling their profits back into the business and it’s difficult to have capital expenditures for upgrading equipment and investing in growth. These are companies that require large purchases of materials and inventory to operate so they are capital intensive on the front end and at the mercy of their suppliers without pricing power at the first step in their production process.

You want to avoid investing companies that don’t have pricing power to pay for their increase in production costs and labor expense. If a company can’t raise its prices with customers without decreasing their sales and volume then they lower their profit margin percentage and decrease their overall profitability in dollar terms as their price and sales remain the same. Companies that can’t pass along their own inflation in their costs to consumers can also go bankrupt if they don’t have adequate capital or credit for extending loans to stay in business as their profits evaporate.

Warren Buffett Inflation Hedge

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils (XOM) and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.” – Warren Buffet

While unproductive assets like gold, art, and real estate can hold their value during inflation as a hedge against a devaluing currency they don’t produce cash flow and don’t have asset production value. Buffett prefers holding stocks of companies that produce commodities like oil and gold during a recession as a hedge. He also bought and owned farmland when he was young that produced a harvest each season. He loves cash flowing assets above all other investment classes, especially in times of inflation which shows from his recent gold mining and oil company purchases. 

Here are the types of companies Buffett suggests that will do the best during times of high inflation:

  1. Companies with low capital requirements and high returns on capital. Businesses with strong brands, high margins, and low capital requirements like Buffett’s holdings of Coca Cola and See’s Candy for example. Also successful software companies that are able to scale their products digitally with low operating costs like Microsoft.
  2. Companies with pricing power that can increase their prices with the rate of inflation with no loss of customers or volume. They have a product or service people want or need consistently regardless of its price.
  3. Companies that have little or no need for cash or continued new capital investments and room for leverage on their balance sheets. They have high cash flow, large cash reserves, and low debt. Apple is one of these types of companies.

Warren Buffett Inflation Quotes

“Inflation “swindles almost everybody” and that it was “extraordinary” how much inflation had been seen in Berkshire Hathaway’s own businesses.” – Warren Buffett 2022

“The best thing a person can do to protect against inflation was to sharpen their skills and focus on being at the top of their field. The best thing to do is invest in yourself.” – Warren Buffett 2008

“The best thing you can do is to be exceptionally good at something.” Warren Buffett’s best hedge against inflation is expertise in your chosen career and vocation. 

“Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you. So the best investment by far is anything that develops yourself, and it’s not taxed at all.” – Warren Buffett

“Inflation acts as a gigantic corporate tapeworm. That tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism. Regardless of a company’s profits, it has to spend more on receivables, inventory, and fixed assets to simply equal the unit volume of the previous year.” – Warren Buffett 1981

“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her saving in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leave her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax, but doesn’t seem to notice that 5 percent inflation is the economic equivalent.” – Warren Buffett

We should all consider the impact of inflation on our own investments and life as it can be the biggest expense over the long term.

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Warren Buffett: How to Make Money During Inflation

Image created by Holly Burns