What Should You Invest in During Inflation Times?

This article is about how inflation is eating your money and why investing is key right now. Plus, about investing in "inflation-proof" businesses. Let’s start with understanding inflation.

Phil Town, value investor guru and mentor, talked about inflation in his webinar this week. At the current 8% inflation rate the buying power of your money are cut in half within 9 years, he said. If you have $50.000 now and the inflation rate will stay at its current level, your money will be worth 25.000 in buying power in 9 years. The average inflation rate through the past 20 years is 3%. 

Understanding how to invest like Warren Buffett is critical right now because you must get an annual rate of return of at least 8% per year to not have your money eaten up by inflation. And the companies you invest in must grow at more than 8 percent per year.

 “Inflation acts as a gigantic corporate tapeworm […] Under present conditions, a business earning 8% or 10% on equity often has no leftovers for expansion, debt reduction or “real” dividends.  The tapeworm of inflation simply cleans the plate.”

Warren Buffett (1981)

Warren Buffett is not known to sell or buy stocks based on macro-economic predictions. He focuses on buying wonderful businesses, with great management and with a competitive advantage. 

However, he has commented on the inflationary environment throughout time.
Back in the late 70’s inflation was at 13%. At that time Buffett encouraged investors to hunt for stocks, such as newspapers and other companies, which would be able to raise rates in steps. Nowadays newspapers are taken over by news on the internet, but the main point is: Well-known consumer brands which are able to raise prices on their products at the same pace as inflation, and consumers are still buying the products despite the increase in prices. For example, branded soft drinks, small luxury goods (like perfume and nail polish) etc. 

And Buffett suggests that you should avoid companies with a big capital cost.
In an inflationary environment, companies that need a lot of capital are going through a rough time. Companies that need more money to replace equipment and inventory.

Last, he mentions a business that is like a toll bridge. The cost is in the beginning when building the bridge, and once it’s up and has been paid off (through the toll fees) it’s very low-cost to maintain. This type of business is wonderful - especially during high inflation because of the low maintenance costs.

Read the article about how understanding inflation got me started investing.