How To Invest During A Period Of High Inflation
Invest in the right businesses and you will never need to worry about high inflation.
Do you think we are approaching a period of high inflation soon? What does this mean for your investments? How can you safeguard your own investments against the rising inflationary environment?
If you worry about these questions, fret not. In this article, I will be sharing how you can invest and perform well even when inflation is rising.
How Inflation Affects Businesses And Your Investment
Before I dive into how you can invest during a period of high inflation, I think I ought to explain the role inflation plays in the investing scene, in case some readers might not really understand it.
So, when inflation rises, the purchasing power of consumers decreases. This means that businesses will record lower sales, which in turn impacts their total revenue.
To counter the potential losses, businesses will have to raise their prices.
However, if the business is unable to raise its prices without losing its customers, then the business may be in trouble. Investing in such businesses would be detrimental to you.
Characteristics Of Businesses That Can Cope Well With High Inflation
Warren Buffet (he needs no introduction), in his 1981 shareholder letter, shared 2 key characteristics that businesses must have to cope well with high inflation.
- The business must have the ability to increase prices easily without worrying about significant losses of either their market share or their unit volume. This basically means the business must possess pricing power.
- The business must have the ability to increase a huge amount of sales volume without needing to make significant capital investments. This basically means for every new customer the business attains, the additional cost should be low.
An example of the type of business that will do well during inflation would be tech-related businesses, such as Meta Platforms (previously Facebook) and DocuSign, to name a few.
Such businesses have low marginal costs. How much money do you think Facebook will need to spend in order for you to create an account and join the platform? Very minimal, if any.
How You Should Invest During Period Of High Inflation
Invest in the businesses that possess the characteristics that I have mentioned above.
DO NOT care about the macro. DO NOT worry about high inflation. DO NOT try to predict where you think the inflation rate will go moving forward.
Even Warren Buffet failed to predict the inflation rate in the 1970s and 1980s. In the 1970s, Buffet felt that the inflation rate would get worse. However, from 1970s onwards, the inflation rate actually fell (according to the data provided by World Bank).
If the investing legend himself could not predict the inflation rate, you really should not try to.
Buying the right business will give you a far more superior result than constantly investing based on the current inflationary environment. Buy and hold is the most important. I have previously talked about the importance of holding, and in case you have yet to read them, I’ll link it down below:
Parting Words
Focus on investing in businesses that can survive any environment we are living in. High inflation, high-interest rate, low inflation, or low-interest rate. If a company can handle all these scenarios, the company is in a great position.
Such companies are usually those with pricing power and low marginal cost for every customer it attains.
What do you think? Share them with me in the comments section!
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