💥 Check out this awesome post from Investopedia | Expert Financial Advice and Markets News 📖
📂 Category: Warren Buffett,Business Leaders,Business
💡 Here’s what you’ll learn:
Key takeaways
- Buffett calls self-development “the best investment ever” because skills cannot be taxed or “inflated.”
- The next best hedge is to own shares in companies whose products require little new capital but are capable of raising prices at the rate of inflation or even higher.
- Companies built on equity-like models or networks often convert revenue into cash without requiring significant reinvestments, giving them room to pass on rising costs.
Inflation may ebb and flow, but the two lessons Warren Buffett learned to combat it are timeless.
- Be so good at what you do that people will pay a high price for your skills.
- Own shares in companies that don’t need constant cash infusions to keep earnings growing.
Invest in yourself: the ultimate inflation-proof asset
Buffett, CEO of Berkshire Hathaway (BRK.A; BRK.B), rates “human capital” above any symbol.
“The best thing you can do is be exceptionally good at something,” he told shareholders in 2022. “Whatever abilities you have cannot be taken away from you. They cannot actually be amplified away from you.”
Wage growth for scarce, high-skilled, high-quality experience typically exceeds inflation. A top orthopedic surgeon, a cloud security engineer, or even an elite hair stylist can raise fees as costs rise because clients value the results more than the initial input.
Unlike a factory, your mind and reputation don’t need expensive upgrades, just constant training and learning. The Internal Revenue Code does not tax you when you master a new skill.
“The best investment, ever, is anything that improves yourself,” Buffett said. “And again, not taxed.”
In 2008, he gave a similar answer when asked about the best investment to hedge against a debt crisis.
“Develop your own talent. If you’re the best doctor in town, if you’re the best teacher in town, if you’re, you know, the best salesman in town, you’re going to do well no matter what the value of the coin is,” he said. “You’ll get your share. So investing in yourself is always the best thing.”
Low capital costs and strong pricing power
In the same 2008 interview, Buffett offered a second strategy for fighting inflation. “The next best thing is to own products or stocks that contain products that don’t require a lot of capital investment,” he said.
This is because the price of capital investment will rise with inflation. But companies that don’t need a lot of capital, especially those with strong brands and pricing power, will weather periods of inflation relatively well.
These are companies that enjoy steady, lasting demand and high profit margins without constant spending on capital-intensive assets such as new factories.
Classic examples
- Consumer goods with strong brands. Coca-Cola (KO) and Procter & Gamble (PG) are two such companies. Recipe modifications cost a few cents, but prices rise as grocery stores expand.
- Software companies and platforms. After the initial code base, updates can be pushed out, and incremental users add revenue at little cost, allowing subscription prices to track inflation by wide margins.
- Models that look like royalty. Think credit card networks, music catalogs, or franchise systems. Each small drawing segment is on an increasing nominal basis.
advice
Investors should still scrutinize valuation, competitive threats and debt levels. “Asset light” does not automatically mean “inflation resistant”. But historically, companies with pricing power and minimal reinvestment needs have been able to expand their dividends more quickly than the CPI, protecting shareholders from the erosion of purchasing power.
Bottom line
Buffett’s advice is remarkably simple. First, turn yourself into a must-hire professional. According to Buffett, the best protection against inflation is “your personal earning capacity.”
Second, when you invest, favor companies that do not need to spend capital and have the ability to raise their prices with little impact on sales.
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