Inflation is an inevitable change which brings its own advantages and disadvantages. We have always heard of inflation to be this monster which makes the value of our money go down. But there’s more to the matter than just prices increasing. Many thinkers have found ways which might help curb inflation. But Warren Buffett has a completely holistic approach towards it. And why is his viewpoint important to us? He is undoubtedly one of the best investors since decades now. “Price is what you pay, value is what you get” is his way of looking at the market.

It moreover depends on the principles he believed in rather than just the wealth he created. As many of us want to be successful and make it big in life we realize we want to be perfect at everything. But to our irony even the finest investor says, “I make many mistakes” -WB.

Surprising to see that he being the best player of the investment world has also been making mistakes. The most appropriate lesson to learn here is even when you make mistakes, accept them and look forwards. Merely creating the pressure to outperform someone and not being able to cherish our mistakes. Lets learn from the master a few tips of handling situations like inflation that are out of one’s control.

1. “Invest in a wonderful business” 

and he elaborates by saying that one should invest in businesses whose products are always in demand regardless of the performance of the dollar. The best example to explain this would be investing in a company like “Coca-Cola” because however high the inflation is people will buy their favourite soda. The taste of Coca-Cola is so imbibed in the world today that the demand for its products is always high and the customers are so accustomed to the experience that the demand is ever growing.

Source:  CNBC

Looking at other companies like Gillette, whose products are in the line of personal care and hygiene, make it one of the most consumed brands in the world. The demand for its products is rising as it is a niche market but needed by everyone.

Source: CNBC

 

The simplest yet effective approach towards investing in any company is to understand their business and predict accordingly. Once we are comfortable with the business operations of the company, our approach towards the company’s financials enhances. Investing is a game for the long term and as per Buffett’s approach one should invest in a company as if it were compulsory to invest for ten years or more. Having a long term approach towards investing also helps for developing a foresight of fundamentals to analyze the business.

To understand this better let’s take the examples of a few companies that have outperformed the market during inflationary periods. You must have seen ITC’s products in FMCG, hotels, cigarettes and packaging. Having such a wide spread of industries under one company, they command pricing power and dominance in various sectors. The most revenue contributing segment of the company is the cigarette business with 234 billion rupees. As the hotel business has seen a slump during inflationary times, the cigarette business shows the same growth. This is because people who are used to consuming particular goods on a daily basis will follow it even during high inflation. This gives stability and sustainable growth to businesses and their stocks show stable growth in the long term.

Another similar company that shows indestructible growth is Altria Group in the USA. The company owns the most popular brand of Marlboro cigarettes along with Skoal, Copenhagen, and the Ste. Michelle brand of wine. The company’s product lines are demand inelastic. It simply means that the company’s product demand is not affected by any economic situations. Thus the company benefits from pricing power, increasing prices over and above inflation without suffering from decline in sales. Such companies are inflation proof and show sustainable business growth.

 

Another great example of a stock that outperformed itself during inflation is HUL.

The main reason for this is that when times are tough, the big brands find it easy to increase prices for small quantity of product sold but sell the larger quantity product at lower rise in comparison with small quantity  packaging. The retailers  go after trusted large brands to not hold up on inventory of brands that don’t sell as fast. As companies like HUL have an efficient supply chain they do not face problems producing higher quantities. The company also benefited from inflation in commodity sensitive categories. The company holds a market share of 75% in the certain product lines of the FMCG sector which is a highly competitive market. Strong business stakeholders and sound supply chain proves helpful for firms to command pricing power.

There is another example of Hindustan Zinc which is a subsidiary under Vedanta. Hindustan Zinc is the leading producer of zinc, lead and silver in India. The company is the 6th largest silver producer in the world. The company possesses mining rights which makes it the lead in the mining business. In times of global inflation companies like these benefit from pricing power as most stakeholders will choose them to do business with. The earnings of the stock grew in folds with it having monopoly of mining rights.

Such businesses which have strong demand for their products, seem to always show strength with their fundamentals. A sound business is always the best bet. “Never invest in a business you cannot understand” is how Buffett quotes his urge to invest in companies that have a sound business model and are readily understood by investors.

1. “The strongest protection against inflation is sharpening your skills and working to be at the top of your field”.

“The best thing you can do is to be exceptionally good at something,” mentioning professions like doctors and lawyers as examples, Buffett said that “people are going to give you some of what they produce in exchange for what you deliver”. The second and most vital insight that Warren Buffett gave us is this. This simply means that once you realise that the best project to ever work on is yourself, you would do better in any conditions. In this world crisis of all time high inflation throughout the world, it is necessary that one is the best in their field so that their career is unshakeable. For achieving this level of mastery one should constantly work on upgrading their skills and working to be efficient at work. To this he added “Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you. The best investment by far is anything that develops yourself, and it’s not taxed at all”.

Conclusion: With this in mind the master of investing has equipped us with an approach that will help us in extreme inflationary situations and also other times which are out of one’s control. At ProInvest we believe in working on our skills and developing sound understanding of businesses and markets. Creating financial awareness is on the top of our goals with which we think following investment leaders is important.

AUTHOR: Noopur Patil