What to do with high inflation and rising interest rates? Should we change our investment approach for 2022? Let’s learn what Warren Buffett has to say on this topic.
Original question by Marcus: I am curious to understand how the current prospect of inflation and likely increases in the central bank interest rates will impact ones strategical outlook when investing. Do you have a point of view on this?
Here’s the video:
Here’s the audio:
Download podcast episode
- 100 baggers video: https://www.youtube.com/watch?v=9JiS3DGPEGs
- Warren Buffett’s thoughts on inflation and macro: https://www.youtube.com/watch?v=Zd1_e7o82RQ
The head of Berkshire Hathaway managed a portfolio of stocks through double-digit inflation in the 1970s. Berkshire’s CEO called high inflation a “capital tax” that discourages corporate investment in a 1980 letter to shareholders. An investor pointed out that inflation can be more damaging than income taxes because it can turn a positive investment return into a negative one. one. For investors, this could turn what looks like a positive return into a negative one if inflation gets high enough.
Buffett has long advocated owning companies that generate high returns on capital invested in the company. In times of inflation, companies with low capital requirements that are able to maintain their earnings should perform better than those that have to invest more money at ever higher prices just to keep their positions. If a company can raise its prices, it has a great advantage in times of high inflation because it is able to offset its rising costs.
Buffett once suggested owning real estate during inflation because the purchase is a “one-time expense” for the investor, has no recurring costs, and has a resale value. Inflation also increases the value of the REIT’s assets, thereby increasing the value of their portfolios. In most cases, REITs provide an above-average return and also serve as an effective way to hedge against rising inflation.
Traditionally, stocks that depend on a steady stream of dividend payouts as the basis for their valuation can suffer when inflation rises. Also, if you invest in “dividend aristocrats”, those companies that have raised dividends for 25 consecutive years, you can be sure that these companies will increase their annual payments while bond payments remain the same. If you are approaching retirement, the last thing you need is a period of high inflation to destroy your purchasing power.
In general, many experts recommend investing wisely to prevent inflation. That’s why financial professionals are urging people of all income levels to consider investing as a way to stay out of inflation and maintain purchasing power until retirement. Any of these strategies can protect your portfolio from the inevitable volatility in the investing world.
Legendary investor Warren Buffett recently warned of inflation as he saw resource prices rise for many Berkshire Hathaway-owned companies. From used cars to gasoline to food, inflation continues to drive up the price of goods in the United States. Consumer prices rose 4.2% in April 2021 compared to the previous year, the biggest increase since September 2008.