Warren Buffet: How To Profit From Huge Inflation Ahead

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In this video, I cover how Warren Buffett has prepared and is currently preparing for huge inflation ahead.

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Over the past couple of months, many investors have warned about the rampant rise of inflation, including Michael Burry, Warren Buffett, Charlie Munger, and Ray Dalio. Most recently, on June 10th, the Bureau of Labor Statistics reported that consumer prices were up 5% year over year and 0.6% month over month, which was a lot faster than expected. When using year-over-year numbers, food away from home was up 4%; used cars and trucks were up 29.7%; Airline fares were up 24.1%; energy commodities were up 54.5%; lastly, utility gas service was up 13.5%. These numbers are definitely quite high, as the consumer price increase as a whole represented the highest inflation rate since 2008. Nevertheless, the stock market actually reacted positively as the majority of the inflation was from transitory pressures and the base effect, both of which I have discussed in previous videos. In short, transitory pressures are seen as temporary by the Federal Reserve, and the base effect is when year over year numbers are exaggerated by negative numbers in the previous year. Additionally, there are some potentially deflationary pressures coming from a crash in commodity prices. Nevertheless, in the stock market, there are no certainties, and we should prepare for all situations. In this video, I’m going to cover how Berkshire Hathaway and Warren Buffett have prepared and are also currently preparing to profit from massive inflation ahead. Welcome to Casgains Academy. If you’re new to the channel, please consider subscribing for more content like this, and let’s get right into it.
In a normal year, achieving a 20% return in your portfolio would be ideal, and would be considered a highly successful real return on investment. However, when rampant inflation is on the rise, that is no longer the case. Back in the early 1980s, Warren Buffett made the perfect analogy for inflation, equating it to a giant tapeworm that is continuously present in the stomach of your portfolio. Many of us are often concerned about capital gains taxes or the income taxes taking up a large chunk of our gains, and rightfully so. However, when the size of the tapeworm increases dramatically, inflation can be a much larger problem. Unlike taxes, even if you achieve nonexistent returns, the inflation tapeworm will not care, and continue eating at your money. In Buffett’s words, “that tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism.” So while a 20% overall annual return sounds great, what if I told you during high inflationary periods of time, that 20% growth is the minimum rate required just to maintain the pool of money you had in the previous year? That was exactly what happened when our country experienced unprecedented amounts of inflation in the mid to late 1970s. Since your stocks are portions of the businesses you own, when a business is growing 20% yearly through its earnings, its after-tax purchasing power would not increase at a 14% inflation rate. Earlier this year, Charlie Munger stated that he believes we will soon experience inflation rates in a similar fashion to what we saw previously.
Clearly, such levels of inflation rates make it extremely tough for investors to compound their capital. For example, if inflation is at 5 percent per year and your portfolio is only returning 4 percent per year, then your real return is negative 1% when adjusted for inflation. Not only that, but when you pay capital gains taxes, your return would be even lower than that. A high inflation environment is very difficult to invest successfully in because the inflation rate and the tax rate both work together to destroy your real returns. In 1979, when the inflation rate was at 13.3%, Buffett warned investors that the “combination [of] the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e.,
ordinary income tax on dividends and capital gains tax on retained earnings) - can be thought of as an “investor’s misery index”.

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