“Most people are going to suffer [with inflation}. The idea is to suffer as little as you have to from it.” - Charlie Munger
We live in inflationary times.
Prices are rising, particularly for essentials.
But “inflating” prices are secondary.
The primary problem is currency depreciation.
Our dollar has been eroding in value, faster than the near- invisible 2% rate we have long enjoyed.
At 2%, inflation flies right into our exponential blind spot.
Currency depreciation is less apparent than inflating prices.
Harder to stomach, but easier to deny.
The pride of a nation is the strength of its currency and the US dollar is the reserve currency of the world.
Price inflation and currency depreciation radiate far beyond economics into our social and political life, particularly for people who have not invested or cannot invest:
The poor, those on fixed incomes or living from paycheck to paycheck.
For they have nothing but cash on hand, melting like ice cream on a summer’s day.
Their recourse: woefully expensive credit card debt.
The Rich Are Different
"Let me tell you about the very rich. They are different from you and me." - F. Scott Fitzgerald
Yes, they have investments:
Equities, land, homes, businesses and industries.
Which react to inflation by rising in price, albeit in diminished dollars, maintaining or even increasing in value, and constitute a hedge against inflation.
So those who have investments can maintain their lifestyles in the face of inflation, the cost of which may prove but a small tax upon their wealth.
Long-term lenders and conservative bondholders face more serious loss in the value of both principal and income.
Savers now have a reprieve in higher interest rates, interest that is nonetheless subject to taxation.
Weimar Germany---the classic historical model of an advanced civilization experiencing hyperinflation---actually enjoyed a stock market boom at the outset of the inflationary spiral: share prices skyrocketed as the value of Papiermarks vying for them waned.
It is easy to revel in the rising price of stock shares and ignore the falling value of a once-trusted currency, as our present stock market boom may, at least, in part, suggest.
Hedge Against Inflation
So how do we hedge against inflation?
Let us count the ways:
Gold
Since antiquity gold has been a storehouse of wealth.
But as Warren Buffett always says, “It does not do anything.”
Gold is not a productive asset.
Its greatest value is its endurance, through invasion, disaster, even societal collapse. Which is also, notably, when gold is most vulnerable to loss, theft and extortion.
Equities
Shares of stock in public corporations are a storehouse of value and may even grow in value during inflationary times.
Some sectors more reliably than others: staples, trusted brands, commodities, utilities and fuel.
You cannot stop eating. You must stay warm in winter and cool in summer. You need light and power. You must commute and shop.
The Power of Branding
Most people are brand loyal.
It is not by accident that four of the major holdings of Berkshire Hathaway, including its largest, are beloved name brands:
- Apple
- Coca-Cola
- See’s Candies
- Kraft-Heinz (of Heinz Ketchup fame)
Here’s the late, great Charlie Munger on Wrigley brand chewing gum:
“It’s such a huge advantage to be by far the best-known gum company in the world. Just think of how hard it would be to replace that image. If you know you like Wrigley’s Gum and you see it there for two bits, are you really going to reach for Glotz’s Gum because it’s 20 cents and put something you don’t know in your mouth? It’s not worth it for you to think about buying an alternative gum. So it’s easy to understand why Wrigley’s Gum has such a huge advantage.”
Advantage enough for a stadium and a baseball team!
When Branding Trumps Reason: Parity Products
When I was a boy in the 1960’s a market researcher visited our apartment house to ask housewives about brand loyalties.
My very practical mother, who had few brand loyalties, earned his ire: she frankly told him she bought whatever parity products were on sale, knowing that one bleach or detergent was little different from another.
Not because she was stingy, because she was smart.
For when neighbors complained the superintendent did not respond to their distress calls my mother kept silent.
She understood the power of incentives and always generously tipped the “Super.”
When Branding Succeeds For No Good Reason
My father, when he found success, paid top dollar for Russian vodka. It mattered not to him that, by law, all vodka sold in the US is 100% grain alcohol. He loved the distinctive bottle and the flavor, even when I explained that my esteemed organic chemistry professor had discovered, upon spectrometry, that the pleasing flavor of his vodka lay in a trace of poisonous methyl alcohol, from antiquated Russian stills.
Branding and Pricing
Branded products with customer loyalty can hike prices with aplomb, in ordinary times and inflationary times.
If you like and admire a product you’re almost proud to pay it: “It’s worth it and I’m worth it!”
You’ve shown the world you have both money and taste.
Who quits Apple iphones or uses other than Heinz Ketchup (60% market share US; 80% in Europe)?
Pepsi beats Coke on blind taste tests and has more sugar and caffeine---but fewer loyalists.
People enjoy brands and advertising for brands. During World War II when the Stars and Stripes removed advertising from their pages our soldiers protested until the ads returned.
When I visited then-communist Prague in 1969 there were no posted ads or billboards. This barren cityscape looked almost war-torn as a result.
Pricing Power
Here’s Warren Buffett on the pricing power of See’s Candies:
“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. And if you have to have a prayer session before raising prices, then you’ve got a terrible business.”
“When we bought See’s Candies, we didn’t know the power of a good brand. Over time we just discovered that we could raise prices 10% a year and no one cared.”
Warren Buffett on the Best Investment in Inflationary Times
Only 61% of US adults invest in stocks. But everyone must invest in one’s self.
According to Warren Buffett that universal investment is the best investment at all times, including inflationary times.
Listen to the great man discussing burgeoning inflation at the 2022 Berkshire Hathaway Meeting, alongside dear departed Charlie Munger:
