Key points
- Warren Buffett advocates patience even as inflation runs hot.
- Companies that can easily raise prices without suffering a loss in sales are his bets for inflation.
- The ‘Buffett Indicator’ is an indication of how expensive the market is.
Warren Buffett is one of the most successful investors of all time and his unique insights could help us protect ourselves from inflation.
Be patient. The right opportunity will come
The first step he teaches is not to panic. In fact, this is a good rule to follow at all times when making investments. Yes, inflation is here, but that doesn’t mean our savings are already worthless. Buffett has always advocated a calm and patient approach to investing based on careful research and waiting for the perfect opportunity.
Inflation is a scary word and when experts are sounding alarm bells it can feel like we have to put our cash into stocks as soon as possible.
But inflation can hit companies just as hard as it hits savings. If firms have to raise prices to keep up, they can often see a reduction in sales. So, in times like this there is one key metric Buffett says investors need to look out for.
Can a company raise prices without losing sales?
It’s a simple question, but one which few companies will be able to answer yes to. Buffett’s own portfolio points us towards an excellent example. Apple is one of the most famous and popular brands in the world. I personally don’t buy Apple products, but I know a lot of people who do. They often take pride in their tech, and are willing to pay a premium for it as a form of status. My sister even joked that men who don’t have iphones are less attractive than those who do.
Buffett recognises the power of this branding and counts on the fact that, even if Apple is forced to raise its prices, its loyal customer base will continue to buy its products.
Even so, just because a company might be able to raise its prices doesn’t mean I should buy its shares right now.
The ‘Buffett Indicator’
No matter the year, the company or the circumstance, Warren Buffett refuses to pay ‘full price’ for a stock. There are simply too many events that may come along that can knock down the value. Undervalued shares can still be found, but on the whole the US stock market is trading at an all-time-high. We know this because of the ‘Buffett Indicator’.
The Buffett Indicator is an equation that takes the value of the US market and divides it by the country’s annual GDP, then converts the answer into a percentage to get the valuation to GDP ratio.
Right now, that number is 211%, significantly higher than the historical trend. While this doesn’t mean that the market is going to crash, it does mean investors are currently paying a premium for company shares.
The key lesson I’m taking away from all of this is to stay calm and be patient. Yes, inflation is running hot, but that does not mean I should act rashly. There will be opportunities to strengthen my portfolio, and when they come along, I know exactly what I’m looking for.
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James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
