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 (BRK.A, Financial) (BRK.B, Financial) 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.
Read more here:
- Howard Marks: Investors Need to Be Aware of Bias
- Valuing Berkshire Hathaway's Businesses
- Warren Buffett on Risk: It's What You Know that Matters
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
