During the last months, statistics regarding inflation rates have signaled an increase that is higher than the rate during recent years. The uptick has led to investors and financial experts alike to reflect on the current atmosphere. “We’re seeing very substantial inflation,” relayed Warren Buffett, chairman and CEO of Berkshire Hathaway, in May 2021 at the conglomerate holding company’s annual shareholder meeting. “We are raising prices,” Buffett added. “People are raising prices to us and it’s being accepted.”
His comments came just after prices for consumer goods jumped amid growing concern from investors and businesses alike. In April 2021, the consumer price index raised 4.2 percent since April 2020, the largest increase since September 2008. The central bank has forecasted an annual inflation rate of 3.4 percent for 2021.
What’s an investor to do? While inflation can cause alarm, it’s not an anomaly; during some years it has been higher than others. Well-known investors have lived through periods of inflation, and today share guidelines regarding what moves to make with your money. Here are thoughts from Buffett and other famous investors on investing during times of high inflation.
“Bonds are not the place to be these days,” Buffett shared in his annual shareholder letter in 2020. In a high inflationary setting, bonds may provide a yield that is less than the rise in prices. For instance, if you invest $1,000 and receive a return of 5 percent, in a year you could expect to have an investment valued at $1,050. In a situation with an inflation rate of 7 percent, however, the prices of goods will be higher: you would need $1,070 to purchase what cost $1,000 the previous year. The $1,050, even though it gave a return, would still leave you short $20 to buy the same items and services.
That said, Buffett has expressed positive sentiment over TIPS (Treasury Inflation Protected-Securities), which are bonds partially adjusted for inflation.
In addition, Buffett has long advocated investing in yourself. With a strong skill set, you can ask for rates that align with the increase in consumer prices. A dentist may charge more during periods of high inflation to cover the cost of the increase in expenses to run the office. A photographer might increase the rate for capturing moments at an event, thereby providing a higher level of income to pay for living and business expenses.
As founder of Bridgewater Associates and a billionaire investor, Ray Dalio recently stated that rising inflation could force the Federal Reserve to raise rates sooner than expected. With rates increasing, along with other economic factors, Dalio penned a LinkedIn article titled, “Why in the World Would You Own Bonds When…” His stance is to move away from bonds and look at other asset types.
“A well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix,” Dalio wrote in the article. Non-debt assets are those that have no loans or debt attached to them. Nonfinancial assets might include real estate and other types of property investments.
“We have a new baseline of wages that we are generating,” billionaire investor and hedge fund manager Bill Ackman stated during an interview at the Wall Street Future of Everything Festival in May 2021. Ackman is the founder and CEO of Pershing Square Capital Management, a hedge fund management company.
Given the rise in worker pay, “You want to own businesses that can raise prices to make up for their incremental costs, whether that’s labor or lumber,” Ackman said. A restaurant that can increase prices on its menu and use the higher revenue to pay its workers more is an example.
“Inflation is here and it’s going to get worse,” said Jim Rogers, a commodities investor and co-founder of the Quantum Fund, stated in a recent Bloomberg interview. Rogers owns commodity ETFs, which are exchange-traded funds invested in commodities such as natural resources, precious metals, and agricultural goods. Commodities typically rise when inflation accelerates, which can provide a certain level of protection to investors. “I also own gold and silver,” Rogers shared.
Looking at inflation and economic impacts throughout the globe, “everyone in the world should have some money outside of his own country,” Rogers stated in an Economic Times interview in February 2021. “First of all, there are great opportunities in many parts of the world; and second, it is an insurance policy, if nothing else.”
As a billionaire investor and hedge fund manager, Stanley Druckenmiller stands concerned over the current policies and market conditions coinciding with inflation rates. “I can’t find any period in history where monetary and fiscal policy was this out of step with the economic circumstances. Not one,” he said in a recent interview. “The most probable, and the elephant in the room, is that inflation becomes so obvious that the Fed has to move.”
Waiting to raise interest rates could lead to a later bubble and greater negative market reaction. Give the current uncertainties, Druckenmiller touched on the possibilities of moving away from equities. “I will be surprised if we’re not out of the stock market by the end of the year,” he stated.