Warren Buffett: How To Invest During Inflation (feat. Peter Lynch)

Over the last few months, we are seeing record levels of inflation across the country, as Russian and Ukraine war is still on going, the war is having a negative impact on our economy
For example, the price of gasoline, is up 74% since the beginning of the year, not just that, other commodities are experiencing similar price increment
[Include hotels, eggs, and fats and oils, up 24%, 13% and 11%, respectively.]
On average, prices climbed about 8.2%, the fastest pace of inflation since 1982. In fact 40 years high
When the economy gets to this point, the Federal Reserve’s step in to cool the economy by increasing prime rate,
In September, the Fed increased prime rate by 75 basis points (0.75%),
Just like that a $450,000 mortgage home, get $1,958 more expensive than before each month. But rising federal fund rate doesn`t only affect home owners, businesses also borrow money too.
When prices gets too high, consumers try to reduce spending or not spend at all, If you couple that with consumers not having spare money to spend because now they are so focus on saving money, all of a sudden businesses sales decline and stock prices of companies takes a fall.
But the question is, how we investors protect ourselves from losing money in the stock market.
Let first take a listen to the oracle of Omaha Mr. Edward Warren Buffett
The next clip covers two important points about how to invest during this time.
Point number one “The Companies must have pricing power to offset inflation and requires less capital to operate”
Point number two “increasing your Earning power”
Let talk about the first point “pricing power and less capital requirement”,
Price power basically means a business having the ability to raise price without reducing volume unit of production. Pricing power, is always positive for companies that can sustain it, maybe a competitive advantage for the company. Rising costs can erode a company’s profit margins and, ultimately, investor returns in inflationary period. Since the company is spending more in production for less product or same volume of product. Companies with clear, sustainable pricing power can protect their profit margins by passing those costs to their customers. That is called Economic moat, the ability of a company to do things in a way to increase business earnings without a decline in sales.
If this isn’t done well then is going to be a bad move for the company, if raising price isn’t a competitive advantage for the business then obviously the company is going to lose customers which will have a negative impact on the company earnings. Also let not forget, in an inflationary times, companies usually cut down business expenses by reducing their work forces and even reduces expenditure on advertisement.
This leads us to the next point, “increasing your Earning power” this is very important point to all investors and not just investors but to anyone watching
Increasing your earning power basically means just investing in yourself to become more useful to yourself, company or if you are self-employed then you have to build up your skills to leverage on the skills to generate more income to supplement your style of living.

0:00 Warren talking about inflation

1:01 effect of prime rate raise and Inflation
2:32 Point one
02:38 Point two
02:42 Pricing Power and unit volume
02:45 Defining Pricing Power
02:52 Pricing, Volume unit and Economic moat
04:14 Explaining Earning Power
5:01 Peter Lynch Understand what you own

[josephbower]

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