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How to beat inflation? Buffett gave a simple sounding suggestion

At this year’s Annual Shareholder Meeting, he said that inflation swindles everyone. Then, he spoke of one way to get around it

May 28, 2022 / 01:10 PM IST
According to Warren Buffett, nothing in economics including inflation is the same the second time, so it is hard to be prepare for it adequately. (File image/Reuters)

According to Warren Buffett, nothing in economics including inflation is the same the second time, so it is hard to be prepare for it adequately. (File image/Reuters)

Inflation is hard to ignore. It is at the petrol bunks, department stores, restaurants and even at the local chai shop. In April, it hit an 8-year high of 7.79%. What can a person do to guard against it?

At Berkshire Hathaway’s Annual Shareholder Meeting, one of the questions posed to Warren Buffet and Charlie Munger was around assets that can beat inflation.

Buffett responded with a simple sounding suggestion.

“The best protection against inflation is your own personal earning bar,” he said.

“If you play the violin really well, then you will do reasonably well during inflation. If you play it way better than other people, then people will pay you for it… Your skills won’t be taken away, your money maybe,” he said.

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The discussion on this started with a shareholder asking about an article Buffett had written in the seventies, that said that inflation swindles the equity holder because stocks can’t keep pace with inflation. Do you still believe this is the case, the stockholder asked.

Also read: Jayanth Varma on super bond-cycle turning and rate-hikes

“Inflation, I should say, swindles the bond investor too. And it swindles the person who keeps their cash under their mattress. It swindles almost everybody,” he said.

He asked the audience to consider a business that is extremely capital light, one that doesn’t take any capital in fact. Then, if the dollar depreciates by say 90%, and therefore things cost 10x as much as before. The zero-capital business owner can then charge 10x as much and keep the “relative position”. But such a business doesn’t exist. On the other hand, there are capital heavy businesses and you need to invest in multiples just to stay in the same place.

Buffett said, “If our utility business — just to say that the dollar is worth one-tenth some years hence from now, we have to have ten times the capital investment, basically. And we get paid a return on that, but we have forced capital investment to essentially keep in the same place.”

So inflation is hard on every asset holder and its trajectory is hard to predict.

“Nobody knows how much inflation will be over the next 10, 20 or 50 years or even next month. People talk about it all the time… but nobody knows (how much inflation will be). A lot of people who will tell you an answer if you pay them enough and other people who will tell you for nothing, because it enhances their prestige and makes them more valuable and all that. But (the truth is) they don’t know and we don’t know and nobody knows,” he said.

He later spoke about how it is even hard to be prepared for any economic event, including inflation. He said, “inflation is never the same. Nothing in economics is the same the second time after it happens than the first, because the first affects people’s attitudes in the second, and their attitudes always influence the activity itself… People write a textbook, and they write it based on the last experience. And people read the textbooks, so they behave differently next time. And then they wonder why they’re getting a different result than they got the time before,” he said.

Given these aspects of inflation, a person’s best bet against inflation is improving their personal skills set. There will always be people to pay for the best doctor or the best lawyer, whatever the price. People will pay for skills, whatever the economy looks like.

Munger warned against investment advisors who suggest bitcoin (as a protection against inflation). “If your advisor tells you to put your money in bitcoin, just say no,” he said.
Asha Menon
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