UK inflation shocked us by staying at 8.7% in May. And that led the Bank of England to hike interest rates as high as 5%.
Warren Buffett has seen plenty of inflation in his time. So what does he, the head of Berkshire Hathaway since 1965, think investors should do in times like this?
Invest in yourself
In 2022, Buffett spoke about protecting ourselves from inflation. He said “The best thing you can do is to be exceptionally good at something. People are going to give you some of what they produce in exchange for what you deliver“.
How does that help us with our stocks and shares investments?
Well, if individuals who are good at something will always be in demand, surely companies that are exceptionally good will also do well.
Buy the best
So, when the value of money is falling, I think we should focus even more on companies that are the best in their field.
I’m not particularly looking for cheap companies right now, I’m looking for really good ones. The ones that really are the best, and whose products will be in high demand for the long term. And high barriers to entry should help too.
What might fit the bill? I’m thinking banks and housebuilders right now. We’ll always need what they offer, and they’re very hard to knock off their perches.
Capital investment
Back in 2015, Buffett pointed to a class of companies that might not be so good during times of high inflation. He was talking of ones that face repeated high capital expenditure.
He picked out utilities firms, for example, as ones to perhaps avoid during inflation.
By contrast, Buffett sees real estate as a good inflationary investment. You buy the property, and it sits there not needing to be bought again and again. Sometimes, like right now, property prices can be weak too.
But they’re not consuming capital, and should generate long-term gains in value. I reckon commercial real estate investment trusts (REITs) might be good to buy now. They’ll feel the pinch, but they just keep on taking in the rents in the long term.
Price rises
Above all, price rises need to be passed on. And companies that can raise their prices along with rising costs, without fear of losing market share, can have an advantage.
To me, that means companies with unique products or services should hold up better. And those selling the same things as hundreds of others should have a harder time.
Supermarkets, for example, have had to keep prices as keen as possible even if it means margins being squeezed. This is because they need to protect their market share from competitors.
Keep buying shares
Above all, I think the key lesson from Warren Buffett is to keep buying shares when inflation is high. High inflation erodes the value of cash, even if interest rates rise too.
Some Cash ISAs in the UK are now offering 4%-5% interest. While that might sound attractive, when inflation is running at 8.7%, it’s losing money.
Cash savings don’t hold up too well when inflation is high. But shares can do a lot better.
