When inflation rises, Warren Buffett recommends these stocks
Price increases for months have weakened the Fed’s claim that high inflation rates would be “temporary.”
“It’s probably a good time to retire that word and try to explain more clearly what we mean,” Fed Chairman Jerome Powell said Tuesday. “I think the risk of higher inflation has increased.”
“It’s probably a good time to retire that word and try to explain more clearly what we mean,” Fed Chairman Jerome Powell said Tuesday.
A hawkish Fed response could cause market panic; the Dow dropped 652 points on Tuesday.
Fortunately, investing legend Warren Buffett has plenty of suggestions. In the 1970s, Warren Buffett managed a stock portfolio through double-digit inflation.
With high inflation, companies need to be able to raise prices easily and take on more business without spending a lot of money, Buffett wrote to shareholders in 1981.
Invest in asset-light companies with pricing power. Here are three Berkshire assets that fit the bill, plus one that may always be in demand regardless of consumer prices.
Apple (AAPL)
No one would call $1,600 for a fully loaded iPhone 13 Pro a bargain, but consumers love to splurge on Apple products.
More than 1 billion iPhones were sold last year, according to Apple’s management.
While cheaper devices are available, many consumers prefer the Apple experience. So, as inflation rises, Apple can raise prices without affecting sales volume.
Apple now accounts for over 40% of Berkshire Hathaway’s market value.
The skyrocketing stock price of the tech giant is one reason for this concentration. Apple’s stock has risen 491 percent in five years.
Recall that after the massive bull run in technology, you can always build a diversified portfolio using your “spare change.”
Coca-Cola (KO)
Coca-Cola is a classic “recession-proof” business. Regardless of the state of the economy, most people can afford a simple can of Coke.
Its strong market position gives it some pricing power. Besides, Coca-Cola can always rely on an old trick: keeping prices the same but shrinking bottle size.
Add to that its iconic brand portfolio and presence in over 200 countries and territories, and it’s easy to see why Coca-Cola is a good long-term investment.
After all, it went public over a century ago. It has thrived in periods of high inflation.
Buffett has owned Coca-Cola since the late 1980s. Berkshire owns 400 million shares worth $20.1 billion today.
Amex (AXP)
American Express recently increased the annual fee on its Platinum Card from $550 to $695.
Inflation also benefits the company.
Merchants are charged a percentage of every Amex card transaction. The company gets a cut of larger bills as goods and services prices rise.
In fact, revenue jumped 25% year-over-year to $10.9 billion in Q3.
In Berkshire Hathaway’s portfolio, American Express ranks behind Apple and Bank of America. Berkshire Hathaway’s stake in AXP is worth over $23 billion.
Berkshire also owns small stakes in American Express competitors Visa and Mastercard.
Yes, AMEX is over $150 per share. It’s possible to buy a fraction of the company’s stock using a popular app.
A ‘forever asset’
He said his favourite holding period is infinity.
And one asset — often used to hedge against inflation — may be in perpetual demand: farmland.
People need to eat no matter how fast consumer prices rise. Bill Gates, Buffett’s good friend, is America’s largest private owner of farmland.
A new generation of investment platforms allows you to own a piece of US farmland.
You’ll make money from leasing and crop sales. You’ll also benefit from any long-term appreciation.