What Billionaires Say About Inflation Protection

By Louis H-P on February 21, 2022

Inflation protection is another term for financial self-defense. Front line defenders like the Federal Reserve in the United States keep a close watch on inflation. Fed money watchers believe that slowly increasing prices can help keep businesses profitable.

As consumers, we are used to slowly creeping inflation. This has been with us for generations. We can accommodate a few percentage points of annual inflation. This is as long as our salaries increase by a similar or greater amount. But what should consumers and investors do when the rise in annual inflation far exceeds a few percentage points? Is there an inflation protection strategy we can follow to safeguard our wealth?

These heavy hitters have billions at stake in the inflation battle

The average investor relies on the advice of stockbrokers and financial experts. These move money around in a leapfrog strategy to stay well ahead of inflation. Generally, most experts suggest investing in stocks as a hedge against rising prices.

Ramit Sethi, author of the New York Times’ best seller, I Will Teach You to be Rich, wrote, “Investing is the single most effective way to get rich. Inflation can be bad for individuals. This is especially the case when you just keep your money sitting in a bank account and do nothing else with it.”

You might be curious to know what heavy hitters like Warren Buffett, Elon Musk, and Mark Cuban suggest in the battle to beat inflation. Not surprisingly, each outspoken billionaire has had a lot to say about inflation recently. Here we recap their top inflation protection strategies.

Warren Buffett says search for value and inflation – Proven companies

Warren Buffett became a multibillionaire through savvy investments and partnering. He is considered the most successful American investor of his generation. He has an astonishing net worth of upwards of $113 billion as of February 2022. Buffett got there by ignoring conventional wisdom and going against prevailing investment trends.

Buffett is worried about the rise in inflation as the world recovers from the pandemic. At his 2021 Berkshire Hathaway annual meeting he warned, “We are seeing very substantial inflation. We are raising prices, people are raising prices to us. And it is being accepted.” That’s a definite concern for investors, who can see their positive returns evaporate to negative income.

Buffett’s top inflation protection tips:

1. “The best businesses during inflation are the businesses that you buy once and then you do not have to keep making capital investments subsequently.” Buffett suggests avoiding companies that have an ongoing need for heavy capital investments, such as utilities and railroads.
2. “If you’ve got something that’s useful to someone else, it tends to be priced in terms of replacement value over time, so you really get the inflationary kick.” Buffett points to investments in real estate and strong brands (such as his investment in See’s Candy, a company he’s held since 1972) as good inflation plays.
3. “Consistently buy an S&P 500 low-cost index Keep buying it through thick and thin, and especially through thin.”

Elon Musk likes cryptocurrency but not for inflation protection

Tesla CEO Elon Musk has an astonishing net worth of $233.6 billion as of February 2022. An entrepreneur, business magnate, and investor in outer space exploration, Musk is also sounding the alarm against inflation.

Musk is concerned about what could be a short-term rise in inflation. Said Musk, “I don’t know about long-term, but short-term we are seeing strong inflationary pressure… Inflation is the most regressive tax of all.”

Musk has invested billions in cryptocurrency, which, not being part of the mainstream banking system, is considered by some as a hedge against inflation. Musk’s largest cryptocurrency investment is in Bitcoin. Both Tesla and SpaceX hold Bitcoin as well.

When asked about his crypto holdings, he responded, “…don’t bet the farm on crypto! True value is building products & providing services to your fellow human beings, not money in any form.”

His second crypto choice is Dogecoin (DOGE). Said Musk, “Lots of people I talked to on the production lines at Tesla or building rockets at SpaceX own Doge,” Musk said. “They aren’t financial experts or Silicon Valley technologists. That’s why I decided to support Doge—it felt like the people’s crypto.”

Mark Cuban likes cryptocurrency, but believes bitcoin is no hedge

Owner of the NBA Dallas Mavericks, this American billionaire entrepreneur does not reach the stratospheric heights of Buffett and Musk in terms of net worth, but his estimated fortune is nothing to sneeze at. It is estimated at $4.5 billion.

Cuban believes that Bitcoin is not now, and will never be, a hedge against inflation. Also, he doesn’t care much about gold as an investment to mitigate the impact of price pressures on a stock portfolio. Why? Said Cuban, “Because gold is not an inflation hedge. That’s just a marketing slogan like it is for (Bitcoin).”

Cuban does believe Bitcoin is a good store for value but has no correlation to inflation whatsoever. Bitcoin is a decentralized, banking-agnostic digital currency. He likes digital currency as an end run around traditional banking, government regulations, and a cashless medium of exchange. However, he readily acknowledges that digital currencies are difficult to trade and volatile.

Ray Dalio says do not pin your hopes on cash

Ray Dalio is another American billionaire (net worth $20 billion) and the founder of the giant Bridgewater Associates hedge fund. Bridgewater is the world’s largest hedge fund firm, responsible for overseeing $154 billion in investments. Dalio wants investors to be aware of the current inflationary environment and stop looking at cash as a safe haven.

Says Dalio: “The mindset needs to change in which everybody looks at the returns in real terms… In other words, inflation adjusted because you want buying power, that’s what you’re trying to store.”

“If you’re holding an asset that has very little return virtually and is not volatile, but loses to inflation… you have to start to look at that and so basically for the most part underweighting or under-using that cash.”

Instead of parking wealth in cash, Dalio suggests investors should stay safely invested in a diversified, well-balanced portfolio. He cautions investors against trying to time the market, which he likens to a “fool’s journey.”

Conclusion

As we have seen in this article, the disciplined investor can plan for inflation. Warren Buffett advises investing in companies that have a brand and product that is desirable, regardless of inflationary pressures. And Ray Dalio warns against selling all your investments and holding your wealth in cash.

Likewise, whether or not you agree with Elon Musk and Mark Cuban on investing in cryptocurrency, you should shop around for asset classes that offer the best protection against inflation.

Those types of investments are what diversification is all about. They include gold and silver, stocks, commodities, real estate investment trusts, and Treasury inflation-protected securities. They can be part of the diversified strategy every investor can use to protect their portfolio/investments.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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