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Buffett on Inflation Investing

Jkca1

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Gotta love him;

"In a classic piece for Fortune magazine in 1977, Buffett outlined his views on inflation: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. ... If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker — but not your partner.”

In a 1981 letter to shareholders, Buffett highlighted two characteristics that help companies thrive amid high inflation: an ability to increase prices easily and an ability to take on more business without having to spend too much.

In other words, invest in asset-light businesses with pricing power

Rule # 1: "Focus on companies that generate rather than consume cash."

Have you changed your portfolio to reflect the upcoming Fed moves and higher inflation, and if so how?
 
"In a classic piece for Fortune magazine in 1977, Buffett outlined his views on inflation: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures.

That's why the political left luvs inflation - because the filthy state can rob you and you can't blame any particular politician.
 
Gotta love him;

"In a classic piece for Fortune magazine in 1977, Buffett outlined his views on inflation: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. ... If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker — but not your partner.”

In a 1981 letter to shareholders, Buffett highlighted two characteristics that help companies thrive amid high inflation: an ability to increase prices easily and an ability to take on more business without having to spend too much.

In other words, invest in asset-light businesses with pricing power

Rule # 1: "Focus on companies that generate rather than consume cash."

Have you changed your portfolio to reflect the upcoming Fed moves and higher inflation, and if so how?
I havnt changed my work investments much. Just never really got into the stock market.
 
Yeah

The man with the most money has the most to lose from inflation no matter what they try to make you believe.

Why do you think the federal reserve had rather kill an economy than let inflation run its course. We haven't even approached the FED's target inflation rate for decades. Now with corporations seeing an opportunity to increase profits with plenty of excuses out there for raising prices the FED has decided they need to cool down this economy.
 
Yeah

The man with the most money has the most to lose from inflation no matter what they try to make you believe.

Why do you think the federal reserve had rather kill an economy than let inflation run its course. We haven't even approached the FED's target inflation rate for decades. Now with corporations seeing an opportunity to increase profits with plenty of excuses out there for raising prices the FED has decided they need to cool down this economy.
What does that even mean?
 
The average person shouldn't be trying to pick and choose individual stocks anyway, much less try to time the market. They'll just mess it up...or worse, they'll get lucky a couple times and think they're a genius. Stock-picking works for people like Buffett who buy enough to have a say in how the companies are run, but not so much for the average investor (as Buffett himself would agree).

Here's how the average person should invest their money in a high-inflation economy, IMO:
  • Don't hold any more money in the bank or low-interest accounts than is absolutely necessary.
  • Buy assets that will appreciate in value - especially stocks (i.e. index funds) and real estate.
  • Don't pay off low-interest debt any faster than you absolutely must. Let it ride for as long as you can, because inflation will eat away at your debt. Instead buy more stocks and real estate.
  • Invest in yourself (e.g. more education and skills). If you're going to school for a useful degree, it's a good time to take out as much low-interest student debt as you can, because you'll get a much better ROI from your skills in a high-inflation economy than the paltry interest rates.
 
Have you changed your portfolio to reflect the upcoming Fed moves and higher inflation, and if so how?

Not really. I still use the same quantitative method for picking individual stocks that I’ve used for the past few years. It’s more of a bottom-up method of investing that largely tunes out macroeconomic events. I did, however, recently invest in several iShares ETFs, two in oil and natural resources, the other in regional banks.
 
That makes no sense.

The theory is politicians who love government and spending money (i.e. leftists) can’t raise taxes high enough to cover it because the people would revolt or vote them out of office. So they prefer deficit spending and then using inflation as a tool to reduce the real debt burden because it’s more of an oblique way of solving the problem. It’s a form of indirect taxation.

 
The average person shouldn't be trying to pick and choose individual stocks anyway, much less try to time the market. They'll just mess it up...or worse, they'll get lucky a couple times and think they're a genius. Stock-picking works for people like Buffett who buy enough to have a say in how the companies are run, but not so much for the average investor (as Buffett himself would agree).

Here's how the average person should invest their money in a high-inflation economy, IMO:
  • Don't hold any more money in the bank or low-interest accounts than is absolutely necessary.
  • Buy assets that will appreciate in value - especially stocks (i.e. index funds) and real estate.
  • Don't pay off low-interest debt any faster than you absolutely must. Let it ride for as long as you can, because inflation will eat away at your debt. Instead buy more stocks and real estate.
  • Invest in yourself (e.g. more education and skills). If you're going to school for a useful degree, it's a good time to take out as much low-interest student debt as you can, because you'll get a much better ROI from your skills in a high-inflation economy than the paltry interest rates.

Lots of good advice here. Yes, it’s probably the case that Joe Average would better serve himself if he just put his money in an index fund and forgot about it. However, for someone willing to learn and put in some effort, they have distinct advantages over large institutional investors such as Warren Buffett.

One advantage is they’re more nimble. They can move in and out of positions in a matter of seconds. Buffett can’t. Another advantage is the small guy has a larger universe of companies to choose from. Buffett’s only going to move the needle by buying large stakes in large companies. So it’s not always a case of the deck being stacked against the little guy.

When it comes to investing in individual stocks, I think the key to success is to have a well-thought-out plan and then stick to it. I use a value-based, quantitative method of choosing stocks based on a method pioneered by hedge fund manager and Columbia business professor Joel Greenblatt. I use this method only for picking large, American and Canadian corporations and use low-priced ETFs for everything else, such bonds and international stocks. This arrangement has worked well for me.

One thing I don’t like about many index funds is they’re market cap-weighted such that a few companies comprise a major portion of the index. This defeats one of the major arguments for investing in an index fund in the first place: diversification.
 
Lots of good advice here. Yes, it’s probably the case that Joe Average would better serve himself if he just put his money in an index fund and forgot about it. However, for someone willing to learn and put in some effort, they have distinct advantages over large institutional investors such as Warren Buffett.

One advantage is they’re more nimble. They can move in and out of positions in a matter of seconds. Buffett can’t. Another advantage is the small guy has a larger universe of companies to choose from. Buffett’s only going to move the needle by buying large stakes in large companies. So it’s not always a case of the deck being stacked against the little guy.

When it comes to investing in individual stocks, I think the key to success is to have a well-thought-out plan and then stick to it. I use a value-based, quantitative method of choosing stocks based on a method pioneered by hedge fund manager and Columbia business professor Joel Greenblatt. I use this method only for picking large, American and Canadian corporations and use low-priced ETFs for everything else, such bonds and international stocks. This arrangement has worked well for me.

One thing I don’t like about many index funds is they’re market cap-weighted such that a few companies comprise a major portion of the index. This defeats one of the major arguments for investing in an index fund in the first place: diversification.

True ... but it's not easy to beat the market over time.

I've had a position in VITAX (Vanguard's market-cap-weighted pure tech index fund) for many years.

I doubt there are many pure tech (or mostly tech) actively managed funds that have outperformed VITAX consistently...
 
True ... but it's not easy to beat the market over time.

I think a knowledgeable small investor who is disciplined and takes the time to do his homework has a good chance of beating whatever benchmark he’s targeting. Active, professional fund managers often handicap themselves by investing in the same hot stocks due to FOMO (fear of missing out). They’re not focused on beating the market as much as they are beating each other, since they’re competing for the same clients.

Also, as a small investor you have more flexibility taking advantage of price disparities. A good example would be buying the drop in Goldman stock that occurred today. That’s not to say Goldman stock is guaranteed to rise in value from here, but statistically buying companies like this after major drops on earnings calls gives an investor good odds of making a profitable trade or investment. If you’re just investing in an index fund or “the market” you can’t take advantage of these disparities.

I've had a position in VITAX (Vanguard's market-cap-weighted pure tech index fund) for many years.

I doubt there are many pure tech (or mostly tech) actively managed funds that have outperformed VITAX consistently...

Okay, but is a market-cap-weighted pure tech fund representative of “the market”? In your particular fund, just two stocks—Apple and Microsoft—comprise 40% of the holdings. That’s great if those stocks do well, but what if they don’t? Can they keep growing for the next five years at the rate they did in the last five? And do they have room to expand their PEs? I mean, it was one thing when Apple had a PE of 13 and was a smaller company, but I think they’re going to run into a mathematical problem called the law of large numbers.

Together, Apple and Microsoft have a market cap of more than $5 trillion. It’s not easy to keep growing revenues at 12% a year when they run more than half a trillion dollars. That’s a lot of additional AirPods that have to be sold each year. Eventually, revenues would be larger than the GDPs of all but a few of the world’s leading industrial economies. As a wise man once said, trees don’t grow to the sky.
 
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