Inflation swindles the bond investor ... it swindles the person who keeps their cash under their mattress, it swindles almost everybody.
-- Warren Buffett
Once you start becoming more financially literate, it's natural to start worrying about inflation. After all, it has averaged between around 2% and 3.5% over many decades -- and even at those low rates, it can take a big bite out of the purchasing power of your retirement nest egg over time. If inflation averages 3% over the next 25 years, a nest egg of $1 million at the end of that time will have the purchasing power of less than $500,000 in 2023 dollars.
Image source: The Motley Fool.
And inflation can get higher than 3% -- as we have been painfully reminded over the past two years. It topped 8% in much of 2022, and in 1980, inflation topped 13%. But what can we do about that as investors? Well, here are some ideas, inspired by super-investor Warren Buffett.
Invest in yourself
Buffett has freely shared his wisdom and advice -- not only regarding financial matters but also life in general -- via many articles, interviews, annual letters to shareholders, and question-and-answer sessions at the annual meetings of his company, Berkshire Hathaway.
In 2009, he remarked that one smart move to protect yourself against inflation is to work on becoming as skilled and valuable as you can be: "If you're the best teacher, if you're the best surgeon, if you're the best lawyer, you will get your share of the national economic pie regardless of the value of whatever the currency may be."
He has also said: "The best protection against inflation is your own personal earning power ... No one can take your talent away from you ... If you do something valuable and good for society, it doesn't matter what the U.S. dollar does."
That's good advice even when unrelated to inflation. After all, if you want to get many raises, promotions, and/or better jobs over your career, you'll stand a better chance of doing so if you deserve them.
Invest in good companies
Some have suggested that Buffett has fought inflation by spending money -- and that makes sense. If inflation is high, then the value of a dollar is shrinking significantly, so it can be smart to deploy that money into assets whose value can grow in tandem with inflation instead of storing it in a financial account.
In 2022, for example, Buffett reportedly spent a whopping $68 billion on stocks. That was surely in order to take advantage of opportunities presented by falling share prices, but it also served Berkshire Hathaway well by not having that $68 billion sitting around earning relatively little during a period of significant inflation. As retail investors, we can behave similarly. But don't overdo it in terms of getting your assets out of cash -- remember that it's always important to have an accessible emergency fund, for example.
At Berkshire Hathaway's 2015 annual meeting, Buffett was asked about inflation. His answer, in part, was that "The best businesses during inflation are the businesses that you buy once and then you don't have to keep making capital investments subsequently."
So -- capital-light businesses instead of capital-intensive ones. (He has also invested in capital-intensive businesses, though -- such as when he bought the entire BNSF railroad.) During inflationary periods, capital-intensive businesses will need to keep investing in various materials at higher and higher prices. For capital-light ones, such as software companies and e-commerce entities, inflation won't take as big a bite.
Buffett has also extolled the virtue of investing in companies with strong brands -- as that can give them pricing power -- the ability to raise prices when needed. He has said that "a brand is a wonderful thing to own during inflation." In that vein, he once quipped about Harley-Davidson: "I kind of like a business where your customers tattoo your name on their chest."
There are many other solid kinds of investments that can be inflation-proof or inflation-resistant -- such as I-bonds, real estate investment trusts (REITs), and investment properties. Whatever investment moves you make in order to defend yourself against inflation, be sure that you have read up on what you're doing and are comfortable with it.
