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Consumer prices rose 6.8% in November, as compared to the same month in 2020, according to data from the Labor Department released in December. U.S. inflation is now at a 39-year-high, and November marked the fifth month in a row that inflation was over 5%. These numbers are no doubt leading many investors to wonder: How can I protect myself against inflation? In general, many experts recommend investing smartly to hedge against inflation. Suze Orman recently wrote on her site that you should “keep investing in stocks” to hedge against rising costs, and Ramit Sethi noted that: “Investing is the single most effective way to get rich. Inflation can be bad for individuals when you just keep your money sitting in a bank account and do nothing else with it.” But what kinds of companies should you be investing in? Here’s what Warren Buffett has said over the decades.
The Chairman and CEO of Berkshire Hathaway, during a 2015 shareholder meeting, noted that: “The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently,” while you should avoid “any business with heavy capital investment.” He highlights real estate as good during inflation, which you may buy once and then also get the rise in value as well; meanwhile he calls out businesses like utilities and railroads as not good investments during inflation.
And at a 2009 shareholder meeting, Buffett noted that the first best thing you can do to protect against inflation is to invest in yourself and your skills: “If you’re the best teacher, if you’re the best surgeon, if you’re the best lawyer, you will get your share of the national economic pie regardless of the value of whatever the currency may be,” he said. After that, he says, “the second best protection is a wonderful business,” which means a company in which the products are in demand even if the company does have to raise prices.
And in a 1981 letter to shareholders, Buffett possibly spelled this all out as clearly as ever, writing that companies that tend to withstand an inflationary environment “must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.”
All that said, perhaps the best thing many individual investors can remember from Buffett is that rather than trying to pick individual stocks, whether we’re in an inflationary period or not, you should go with this tried-and-true method: the index fund, to have and to hold. In 2021, at a shareholder meeting, Buffett declared that “I do not think the average person can pick stocks,” and noted that he recommends the S&P 500 index fund to “have for a long, long time to people.”