5 ways to beat inflation with Warren Buffett

Inflation has just reached a 40-year peak and shows no signs of slowing down. Savings are dwindling away and the next recession seems imminent.

How do I protect myself against inflation?

Making investments that provide a real rate of return means that your investments have beaten inflation levels and your money is growing. (Real rate of return =( 1 + nominal rate) / (1 + inflation rate) – 1). Over recent years investments would have likely beaten inflation due to it being so low but now we are reaching double figures it is becoming more and more unlikely.

1 – Invest in good businesses with low capital needs

Buffet insists on investing in companies that can earn money off little capital investments in economic uncertainty, a company with a high return on capital employed (ROCE) will show this. These companies tend to fair better in uncertain times as they are seen to be less risky due to being able to earn money easier than capital intense businesses. Services related industries tend to have higher ROCE, accounting, advisors, and law firms may be sectors to look at as we enter economic turmoil.

2 – Take a look into Treasury-protected securities (inflation-linked gilts in the UK)

Inflation-linked gilts are bonds offered by the UK treasury that pays a coupon (interest) twice yearly. The amount of coupon received will be dependent on the Consumer price index (CPI) for that period. CPI is a price index of a weighted average basket of consumer goods/ services purchased by households. It includes all aspects of things from housing to transportation to food and drinks. The CPI however tends to be around 1% lower than the RPI which is the actual measurement used to measure inflation.

Although the coupon increases the actual capital value of the bond will likely fall as the BoE increases interest rates to try combat the soaring inflation. You should be careful when buying gilts, they are used more as a diversification tool today rather than a long-term investment.

3 – Invest in yourself and be the best at what you do

Sounds cliche but the best place to always start is yourself, learning new skills and gaining new qualifications will always open more doors. Buffet told shareholders in the 2004 Berkshire Hathaway conference ‘the best lawyers and surgeon in your city benefit from an education paid for with old dollars but prices their services in current dollars without having to re-educate themselves’ effectively meaning skills and qualifications you get will stay with you for life. Knowledge will always equal power in this world.

4 – Look for companies that can raise prices during high inflation

If a company is in a position to increase prices without it affecting business they are in a very powerful position as they can pass its own increasing cost to its customers. Being in a position to do this comes from either operating in a niche, having a strong competitive advantage or having a monopoly over a sector.

Buffet told the financial crisis inquiry commission in 2010 ‘the single most important decision in evaluating a business is pricing power, if you’ve got the power to raise prices without losing business to a competitor you’ve got a very good business model’

5 – Limit your wants

Charlie Munger (Buffett’s right hand man) said the best tool we have to cope with high inflation is ‘not having a lot of silly needs in your life. If you’re not drowning in consumer goods, you have a considerable defence against the vicissitudes of life’

Creating a realistic budget and tracking your spending can help you understand your spending patterns which you can analyse to spot problematic spending