The billionaire investor Warren Buffett reveals the kinds of companies that can thrive during inflation.
Berkshire Hathaway chairman and CEO Warren Buffett’s investing style has always been a patient one. In a 2012 interview with the New Yorker, he said that if you go from flower to flower, you will have to find multiple flowers to make a lot of money. Instead, he likes to invest in his selected few for the long run. Thanks to that, he has built a good idea of companies that perform well even during high inflation. These include:
Companies that have low capital investment
Buffett discussed the companies that are sure to thrive during inflation at the 2015 annual Berkshire Hathaway shareholder meeting. He said, “The best businesses during inflation are the businesses that you buy once, and then you don’t have to keep making capital investments subsequently.” According to him, any business with heavy capital investment is often a poor business to be a part of during inflation. “Often, it’s a poor business to be in general,” he noted.
Companies that don’t require constant reinvestment
Buffett believes that the best business to own is one that doesn’t require continuous reinvestment. That’s because, as the value of the money drops during inflation, reinvestment becomes more expensive. Businesses like railroads and utilities eat up “more and more money” without giving any substantial profits in return.
Companies that offer replacement value
Replacement value refers to the amount one must spend to replace a product. Certain products have a beneficial replacement value during inflation. Buffet illustrated, “That’s one reason real estate, in general, is good during inflation.” He pointed to his own house that he bought over 50 years ago, dubbing it a “one-time outlay”. Buffett added, “You get an inflationary expansion and replacement capital without having to replace it yourself.” In addition to that, if your company builds something useful for others, the price will often include the replacement or reselling value, making it more attractive in the long term. That is to say that, even during inflation, people will be able to resell or replace the product profitably. In doing so, customers get an “inflationary kick”, meaning they benefit even during a period of inflation.
Companies that people have a connection with
When people have a connection with a company, the inflation-induced losses reduce, according to Buffett. He urges people to invest in renowned brands because, no matter how high the value of the dollar, its products will still be in demand.
During a May 2021 Berkshire Hathaway shareholder meeting, Buffett declared that his company was seeing very substantial inflation during Covid-19. He said, “It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.” He also warned of high inflation in the US amid a “red hot” recovery from the pandemic.
Safe to say, the billionaire investor knows what works and what doesn’t in the world of business. However, he is not exempt from the unpredictability brought about by the pandemic. In an interview, he acknowledged the overall uneven impact of the pandemic on businesses, no matter the industry. He said, “The economic impact has been this extremely uneven thing where…many hundreds of thousands or millions of small businesses have been hurt in a terrible way, but most of the big companies have overwhelmingly done fine.”
So, while you attempt to build an inflation-proof company, remember to stay patient and give due attention to Buffett’s tips.
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