To The Moon

Warren Buffett has been thinking about inflation for a long time.

The legendary 91-year old investor had the dangers of inflation drilled into him by his Republican Congressman father, according to biographers, and has repeatedly commented on the subject throughout his investing career.

"We're seeing very substantial inflation. We're raising prices, people are raising prices tous. And its being accepted."

—Buffett said at lastyear's Berkshire Hathaway annual meeting

Consumer prices increased 7.9 percent in February 2022 compared to the prior year, the highest level of inflation in 40 years. Prices for used cars and gasoline each rose by about 40%.

So why is inflation such a concern for investors?

Inflation, or a general increase in prices, causes you to lose your purchasing power overtime. For investors, this can turn what appears like a positive return into a negative one if inflation gets high enough. Owning a bond paying 5 percent interest annually may sound like a solid investment, but if inflation reaches 6 percent, your"real" return goes negative.

How to beat inflation？

According to Buffett, with prices sharply on the rise, its worth revisiting some of Buffetfs best suggestions for combating what he once referred to as a "gigantic corporate tapeworm."

        1. INVEST IN GOOD BUSINESSESWITH LOW CAPITAL NEEDS

Buffett has long advocated for owning businesses that earn high returns on the capital invested in the business.

During inflationary times, businesses with low capital needs that are able to maintain their earnings should fare better than ones that are required to invest more money at ever higher prices just to maintain their position.

Buffett once equated the challenge posed by inflation to"running up a down escalator.'

        2. LOOK FOR COMPANIES THAT CAN RAISE PRICES DURING PERIODS OF HIGHER INFLATION

The single most important decision in evaluating a business is pricing power. You've got the power to raise prices without losing business to a competitor, andyou've got a very good business."

—Buffett told the Financial Crisis lnquiry Commission in 2010.

If a business can increase its prices, it has a big advantage during periods of high inflation because its able to offset its own increasing costs.

        3. STOP AHEAD PAY TOLL

Buffett once said that an unregulated toll bridge would be the ideal asset to own in an inflationary world because you would have already built the bridge and could raise prices to offset inflation.'" You build the bridge in old dollars and you don't have to keep replacing it."he said.

        4. TAKE A LOOK AT TIPS

Treasury Inflation-Protected Securities, or TIPS, is another investment endorsed by Buffett for investors who are concerned about rising inflation.

TIPS pays investors a fixed interest rate twice a year, but the principal amount is adjusted for inflation, as measured by the Consumer Price Index.

       5.INVEST IN YOURSELF AND BE THE BEST AT WHAT YOU DO

Investing in your own talent is one of the best ways to maintain your purchasing power over time, Buffett told shareholders in 2004.

The best surgeon or lawyer in a city or town benefits from an education paid for in "old dollars" but is able to price their services in current dollars without having to re-educate themselves.

Consider bulking up your resume by learning a new skill through online resources or a local college. Pursuing advanced degrees can be expensive, but they can also help grow your knowledge base and make you an indispensable employee in the future.

Increasing your value to your employer and its customers will help you commandyour fair share of earnings overtime.

        6. STEER CLEAR OFTRADITIONAL BONDS

"Bonds are not the placeto be these days," Buffett wrote in his 2020 letter to Berkshire's shareholders.

With interest rates still near historically low levels, bond investors could be hurt significantly in an inflationary environment.

Buffett has pointed out that purchasing a 10-year bond yielding 2 percent is similarto paying 50 times earnings fora business, a key difference being that the bond's earnings cant grow.

“Fixed-income investors worldwide—whether pension funds, insurance companies or retirees—face a bleak future."he said

         7. LIMIT YOUR WANTS

Buffett's business partner and vice chairman of Berkshire Hathaway, Charlie Munger, has his own take for how best to cope with periods of high inflation:

One of the great defenses to being worried about inflation is not having a lot of silly needs in your life. In other words, if you haven't created a lot of artificial demand to drown in consumer goods, why, you have a considerable defense against the vicissitudes of life.

——Munger told Berkshire shareholders back in 2004.

To help with this, consider tracking your expenses through a budgeting app. This will help you understand howyouTe currently spending your money and may help identify problematic spending bursts before they become a habit.

        8. WHAT ABOUT GOLD

Notably, Buffett has shunned gold, an asset often thought of as being a great inflation hedge.

Fans of gold are especially fearful of inflation's impact on paper money, a concern Buffett shares. But as he noted in 2011:

If you own one ounce of gold for an eternity, you will still own one ounce

Instead, he prefers to own productive assets such as: stocks, real estate or farmland that generate dividends, income and food fortheir owners.

Recently, some have referred to cryptocurrencies as the digital version of gold, but Buffett is highly skeptical of these as well.

"Bitcoin has no unique value at all," he told CNBC in 2019. "It doesn't produce anything. You can stare at it all day, and no little Bitcoins come out or anything like that. Its a delusion, basically."

BOTTOM LINE

It's still hard to tell if the current spike in inflation is likely to last or if it will start to recede.

lf you're concerned about rising inflation, consider taking Buffetts advice andown productive assetssuch as high-quality businesses with low capital needs and stay away from low-yielding bonds that don't increase payments along with inflation rates.