Warren Buffett quotes on inflation. How inflation can impact your investments and why it is an important investment consideration.
In one of the Berkshire shareholder meetings, an investor asked Warren Buffett: ‘In a period of high inflation, which of your businesses will do well and not so well?’ Buffett’s answer to this illustrates another important investment consideration when making your next investment.
In a time of high inflation, companies that will perform the best are those that require little capital investment to facilitate inflationary growth and that have strong market positions that allow them to easily increase prices with inflation. That is, if there are relatively few competitors providing the same product to the market.
Buffett cites the example of See’s Candy as one such business that will do well in a period of high inflation. As he notes, the value of the dollar has fallen 85% since he bought that business, but See’s Candy sells 75% more pounds of candy and earns ten times the revenue in spite of that. This feat is possible because See’s has the freedom to price its products to offset inflation and does not require significant capital investment to offset that.
Utilities and Railroads
In a time of high inflation, companies that will not perform as well are those that are capital-intensive. Warren Buffett’s investments in utilities and railroads, for example, will not do as well.
Bonds will also not do as well in an inflationary era. They are unattractive if one believes that substantial inflation lies ahead, for coupon payments are fixed and do not ‘keep up’ with inflation. Also, dollar-denominated bonds carry further exchange-rate risk; the long-term outlook for the dollar remains negative, making long-term U.S. Bonds less attractive as a purchase option.