We finally have some good news! Inflation in the US has fallen to 8.5 percent. It's
not really great news; even though it's lower than previous months' 9.1 percent, that's
still a lot. In fact, at this rate, the economy can’t
function properly. Thanks to the chairman of the fed, J Powell, who kept telling us
that inflation is not an issue and kept printing trillions of dollars. Look at this chart.
Inflation kept climbing month after month. The Fed knew for sure that we were going to
have massive inflation but decided to keep the public in the dark.
Of course, they had a good reason to do that. We had a virus that was spreading across the
globe. We couldn't risk letting people get back to
work, so we printed trillions of dollars. But the moment Russia invaded Ukraine, the
virus somehow disparaged, and we longer print trillions of dollars. Look at the number of
cases. Before the invasion, there was a huge spike right before the invasion, and the number
of cases dropped significantly. People are back to work, and we no longer are worried
about the pandemic as if it's just another disease like the flu.
I am not a conspiracy theorist or a supporter of Trump, but they made such a big deal out
of Trump when he treated covid like the flu. If the government decided to open the country
and get the economy back to work instead of printing trillions of dollars, we certainly
wouldn't have such huge inflation in the first place.
Regardless of what happened, it's what it is, so the question we should be focusing
on is - how do you profit from inflation? We have to adapt to the circumstances and
learn how to profit from the crisis. There are millions of opinions and millions of experts
on the internet, but I suggest we take the advice of the greatest investor of all time,
Warren Buffett. This is not the first time the country has been going through a crisis,
and definitely not the last. War ren Buffett is almost a century old, so he has been in
multiple inflationary periods. So let's find out warren Buffett’s strategy to make millions
of dollars when there is such high inflation. If you are ready, give this video a thumbs
up, and let’s get right into it.
Warren Buffett’s first most important advice is “be exceptionally good at something”.
That doesn't sound like a piece of advice you would like to hear. You probably expected
something like investing in this company or buying that stock. But the truth is that most
people don't have the kind of money that they could invest and are comfortable watching
how millions or even at least hundreds of thousands of dollars would fill their bank
accounts. But here is what people are usually good at, trading their time for money. It's
what we have been taught since primary school.
That’s, of course, not the best way to make money since your time is limited, but your
time is the only thing that you have absolute control over, and no one can take it away.
So the best way to hedge yourself against inflation is by investing in yourself and
being exceptional at something. Be it a doctor, engineer, teaching, whatever. Because no matter
what crisis we are going through, even if it's inflationary, the demand for basic skills
will always be there. People aren't just going to stop visiting doctors just because it's
expensive. People will visit doctors regardless of the price, and during high inflation, people
with skills can raise their prices easily without affecting the demand much.
The only problem is that you should do this way before inflation hits. Which means it’s
a bit late now since inflation has been around for over a year now and reached almost double
digits last few months. So if you want to be ready for the next inflation, think about
investing in yourself, in your skills, in being the master of your craft. Be the best
surgeon, teacher, or lawyer. If you have done that, here is what warren
Buffett suggests next. According to him,
The second best protection is a wonderful business,” which means a company in which
the products are in demand even if the company does have to raise prices.
No matter how badly we hate inflation, it’s just part of the economic cycle. It’s going
to happen regardless of whether you like it or not. Another fact is that not all businesses
are going to survive. A lot of businesses are going to suffer when they start raising
prices, and if they don’t, their profits will shrink since the cost of their products
or services is going to rise due to inflation. So what are the businesses that can withstand
inflation? In a 1981 letter to shareholders, Buffett
possibly spelled this all out as clearly as ever, writing that companies that tend to
withstand an inflationary environment “must have two characteristics: (1) an ability to
increase prices rather easily (even when product demand is flat and capacity is not fully utilised)
without fear of significant loss of either market share or unit volume, and (2) an ability
to accommodate large dollar volume increases in business (often produced more by inflation
than by real growth) with only minor additional investment of capital.”
He is basically saying that if a business is selling a necessity like bread, it can
increase its prices and people will keep buying the bread. It's not going to change anything.
Secondly, the business doesn't need extra huge capital investment to grow or adjust
to the circumstances. For example, if it's a railway business, it takes massive initial
capital to build the railway. However, if its an online business, serving an extra client
isn’t going to cost anything extra like the app store. An extra user is not going
to cost apple anything. Even an extra million users isn’t going to require apple to make
any significant investment in the app store to manage it.
So what are the companies that Buffett invested in during the current inflation?
Buffett didn't reveal everything he bought but did mention several highlights, including
boosting Berkshire's stake in oil giant Chevron to $26 billion, up from $4.5 billion at the
beginning of the year to make it one of the conglomerate's four biggest investments. Berkshire
also spent billions buying up 14% of Occidental Petroleum's shares in the first half of March
and added to its already massive investment in Apple stock.
Oil prices are rising due to reasons we have explored previously. And people aren’t going
to stop using oil. The demand will keep only rising regardless of the price. What's going
to happen at the end of the day is that the increase in oil prices will just influence
everything else. The business will pass that cost to consumers.
Secondly, Apple is the type of company that has turned technology into a necessity. Just
because we are going through such a huge crisis, it doesn't mean people will stop buying iPhones
or MacBooks. iPhones are an essential part of the global economy. People have built entire
businesses around them. People might stop buying cars but not iPhones or MacBooks. They
are not going to get rid of their apple subscription. This is a new reality that they have built,
and that's why despite the fact that Buffett avoids tech companies, he gladly invests in
Apple, and his investment has paid off very well.
But even if you have this information in your hands, you still can't do much about it. What
are the chances that you can pick a great company? Even though these are important characteristics,
you still have to go through their financial statements to make sure that they have enough
liquidity. They are not drowning in debt. They have great profit margins. They are not
one stop away from bankruptcy. The management is wise enough, and the company has a visionary
board. I mean, these are all indicators that you look at to make sure that the company
you are investing in is a great investment. But most people aren’t capable of doing
it. It’s not an insult. It's just a fact because people are busy mastering their own
craft. Most people simply don't have the time to master the art of investing. That's why
Buffett has an advice for everyone.
“I do not think the average person can pick stocks,” and recommends the S&P 500 index
fund to “have for a long, long time to people.”
We have enough data to believe that over the long run, the SP 500 has made great returns.
It has outperformed most of hedge funds and proved to be a great hedge against inflation.
But you have to be patient. Because over the short run, sometimes SP 500 has done pretty
bad, but over the long run, at least 10 years if not longer, the index has proved to return
around 10 percent annually.
So if you are NOT into stocks. Or you think you are a better investor than Warren Buffett
when in reality your portfolio is significantly down after Fed’s rate hikes. You are much
better off listening to Warren Buffett and just throwing your money into an index fund.
To be honest, despite the fact that I pick individual stocks after analyzing them carefully,
I still follow this advice. A big chunk of my investments is in index funds, primarily
the Vanguard s&p500. It’s actually up by at least 15 percent since its bottom line
back June.
Thats it for today thanks for watching, and see you in the next one.