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Rupert Hargreaves
Rupert Hargreaves
Articles (1229)  | Author's Website |

Charlie Munger: The Best Defense Against Inflation

Munger's thoughts on the best way to protect against rising prices

May 12, 2020 | About:

With central banks around the world rushing to print as much money as possible to try and contain the economic impact of the Covid-19 crisis, the risks of a prolonged period of above-average inflation are growing.

This presents a dilemma for investors. As the events of the past ten years have shown, trying to predict inflation is a fool's game. Since 2008, fortunes have been lost by investors betting on an inflationary spiral that never came. The same could happen this time around.

On the other hand, we really could be at the start of an inflationary spiral. Finding an asset that provides protection in both environments is hard. A third scenario could be a period of deflation driven by low demand, quickly followed by inflation from currency dilution.

Trying to time the market is impossible, so trying to time the marco inflation environment to  isn't really something that's worth considering. So, what's the best way to protect against inflation?

At Berkshire Hathway's (NYSE:BRK.A) (NYSE:BRK.B) 2010 annual meeting of shareholders, Warren Buffett (Trades, Portfolio) offered some advice on this topic.

Buffett on inflation protection

Responding to a shareholder who asked him for advice on how to predict inflation, the Oracle of Omaha began his response by saying that it is impossible to predict inflation in general.

He went on to say that when inflation really takes hold of an economy, it doesn't take long for trust in institutions to begin to break down. He then handed the microphone over to his right-hand man, Charlie Munger (Trades, Portfolio), who put forward his thoughts on how to best protect yourself against inflation:

"The best defense, of course, is to contribute as much as you can to the civilization and expect to counter inflation's effects by your own merits. That's the safest antidote. The idea that just by outsmarting other people you can somehow profit from the inflation is a much more dangerous course of action."

Buffett went on to add:

"Your money can be inflated away but your talent can't be inflated away. If you're the best brain surgeon in Omaha, or the best painter, or whatever it may be, you will always command your share of the resources around you, you know, whether the currency is seashells or $10 million notes, or whatever it may be."

Granted, this wasn't a very satisfactory answer for investors. It doesn't really tell us how to protect our money in an inflationary environment. However, it could be particularly useful if trust in financial institutions begins to break down.

There are also a couple of other takeaways from this information. For a start, Buffett and Munger have always advocated long-term investing. Long-term investors need to ignore what is happening in the short-term. The best way to do this is to invest money you can afford to lock away for the next ten years or lose completely. If you are relying on your investments for income, that's just not possible.

Munger and Buffett have also always advocated building out your circle of competence and improving your education. This might not seem that important on a day to day basis, especially if you have enough money, but over the long term, the benefits of enhanced education have no monetary equivalent.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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Rating: 5.0/5 (5 votes)



BEL-AIR - 1 month ago    Report SPAM

To protect yourself from inflation You have to own real assets, like real estate, rental property, businesses, stocks.... etc

If you would have owned any of these during any inflational spiral in any time in history, you would have been better then if you not had those.

Dirt2624 premium member - 1 month ago

Buffett and Munger have also discussed the need to find companies with pricing power combined with very low required investment in equipment. Coke instead of a rail road - well- even Buffett breaks his own rules from time to time - airlines anyone??? - LOL

Jdg123 premium member - 1 month ago

I find both answers to be rather useless- sure you can contribute and command your share of resources as they say- but that's for the currency you earn that day (seashells or million dollar notes so to speak) but what about the effects of inflation on the prior decades seashells? They are eroded away on a minute by minute bases- the better answer might have been - elimination of the federal reserve- that would stop politicians from being able to spend money without raising taxes first- which we all know they won't attempt to do - because that would be political death- so eliminating the federal reserve would be step one- then we could look to other inflationary institutions like the IMF and the world bank which support despots and dictatorships with your inflation paid back door taxation. Wonder why the Oracle didn't mention these institutions?

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