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2-year chart of OXY, inflation and oil price

Warren Buffett’s thoughts on inflation

A couple of weeks ago I wrote an article about inflation. It’s a hot topic. I figured it would be a good idea to get the perspective of a few other investing legends.

Their investing advice differs somewhat from Lynch’s. Lynch would say don’t worry about macroeconomic forecasts. Find businesses with good earnings. Good businesses don’t succumb to inflation so neither should you.

The advice of Warren Buffett isn’t much different. To him a business with pricing power is insulated against inflation. Additionally, he suggests investing in yourself as a hedge against inflation.

What is pricing power?

A company with pricing power has the ability to pass along higher costs needed to produce its product without it effecting their sales. For example, Coca-Cola might need to spend more on sugar from one year to the next. Despite the cost increase people still buy lots of Coca-Cola.

Tellingly, Buffett has been buying a lot of Chevron and Occidental Petroleum lately. The price of oil has risen from -$37/barrel to over $100/barrel over the last two years. Despite the rise in price people and businesses are still buying oil.

As an aside, I came across a couple of interviews with father and son investment team Bill and Cole Smead. They’re Buffett disciples and like him having been buying oil and gas companies to hedge against inflation. The first interview with Bill Smead is a little long but worth it for the insight. The second interview with Cole Smead is shorter but still full of insight.

Invest in yourself

The second piece of advice that Buffett has for people is to invest in themselves. Much like oil is indispensable to the functioning of our modern civilization, a person whose skills are in demand will have pricing power.

During inflation, Goodwill is the gift that keeps on giving.

Warren Buffett

A logical conclusion of low unemployment rates is employers are forced to increase their salaries to retain employees. Right now the unemployment rate is 3.6%. That’s low enough to start a noticeable shift in our culture known as the Great Resignation. Employees have leverage over employers. If they don’t get the salary they want they can just go to another company.

Since were talking about Buffett’s thoughts on inflation I should point out that at the recent 2022 Berkshire-Hathaway meeting he recommended reading Trillion Dollar Triage. It’s an account of how the federal reserve responded to the Covid pandemic. It explains why there’s so much inflation right now.