Inflation: inflation, inflation, inflation, inflation, inflation, inflation, inflation, inflation, inflation, inflation, the costs are just up up up. Over the past couple of months. Many investors have warned about the rampant rise of inflation, including michael burley, warren buffett, charlie munger and ray dalio, most recently on june 10th. The bureau of labor statistics reported that consumer prices were up five percent 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.

Four percent used. Cars and trucks were up. 29.7 percent airline fares were up, 24.1 percent energy commodities were up 54.5 percent and, 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 caskians 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 tax is 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 non-existent 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 that, during high inflationary periods of time that a 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 you will soon experience inflation rates in a similar fashion to what we saw previously, you expect the next 10 years to have lower returns in the equity markets than the last 10.. It doesn't give us an idea why the answer is yes, could you give us a hint as to why that might happen? Yes, because so many people are in it and the frenzy is so great and the systems of management, the reward systems are so foolish that i don't think it's going to work at all.

I don't think i i think the returns will go down. Yes, in real terms, the returns will be lower. Clearly such levels of inflation rates make it extremely tough for investors to compound their capital. For example, if inflation is at 5 per year and your portfolio is only returning four percent per year, then your real return is negative, one 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 percent, buffet warned investors at 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 when this index exceeds the rate of return earned on equity by the business, the investor's purchasing power or real Capital shrinks, even though he consumes nothing at all. We have no corporate solution to this problem. High inflation rates will not help us earn higher rates of return on equity.

The return on equity is a company's net income divided by the valuation of its equity. This represents the percentage of earnings that investors would theoretically receive by investing in a stock, also known as the earnings yield. Essentially, if this earnings yield is lower than the inflation and tax rate combined, then investing in that stock would guarantee negative returns. So how do investors best prepare for potentially high inflation in the coming years? First of all, to start with the worst asset to invest in during high inflationary times as bonds, which doesn't come as a surprise.

Interest rates are so low on bonds. Right now that the returns are laughable in buffett's 2020 letter to berkshire shareholders, he said bonds are not the place to be these days. He then explained how purchasing a 10-year treasury bond with a yield of 2 percent is similar to purchasing a business with flat earnings growth at the pde of 50.. This is because, when a company is flat earnings, growth and a pde of 50, that company has an earnings yield of 2 percent, which is the equivalent of a two percent bond yield.

As a result of this, stocks are substantially more attractive than bonds right now, but not all stocks are the same. One important statistic that is necessary for those looking to profit from inflation is whether a company is low. Capital needs to maintain earnings growth. Some of you may know that michael bury a famous short-term investor, recently bet big on inflation.

In his recent moves, he purchased calls on consumer stable stocks like craft times and also tech companies like google and facebook. One of the reasons why he did this was because those companies require little to no capital to maintain their operations. Google search engine youtube, facebook, instagram and craft times do not need much money to keep growing. On the contrary, companies like airlines are prone to inflation, because those companies need much more capital just to maintain operations.

The reason why this is important is that businesses like airlines have to adjust their prices in order to account for higher fuel prices and maintenance costs. Essentially, those businesses that require capital must raise prices quickly, just to maintain profits. However, since inflation is constantly occurring, prices must also constantly rise. Buffett thinks that this is similar to running up an escalator that is going downwards when fuel prices increase, airlines must adjust their prices.

However, just like going up a downwards escalator, fuel prices are going to increase again, which forces prices to increase again. We saw this occur in the most recent inflation report where airline fares were up 24.1 percent year-over-year even before the pandemic, airlines, savage single-digit, profit margin, percentages per passenger. Another important factor to watch for in inflationary periods is whether companies can raise prices during periods of higher inflation. Warren buffett is raising prices in his fully owned businesses and is being accepted by consumers.

We're raising prices, people are raising prices to us and it's being accepted. Essentially, what you're looking for is whether the company is pricing power in the financial crisis inquiry commission in 2010 buffett explained how the single most important decision in evaluating a business's pricing power you've got the power to raise prices without losing business to a competitor and you've Got a very good business, not surprisingly, if a company can raise prices, then this can help offset inflationary pressures. One example of this is tesla which increased the prices for the model 3 and y without much of a problem. Do you know that while tesla can raise prices, it is also simultaneously negatively impacted by inflation as we'll cover soon now, on the flip side, if companies without much demand, usually can't increase prices, then that's a major issue because it will take away from profits.

The last factor is whether a company has to constantly borrow money to grow. After all, if inflation rates increase, interest rates must increase as well. This primarily hurts all growth-oriented companies, as growth stocks frequently borrow capital to grow. Personally, as discussed in previous videos, i'm invested in valet mining as a hedge against inflation and as a long-term play on the eevee industry.

Valet fits into all the criteria. The company does not require much capital to maintain operations, has pricing power as the largest iron and nickel mining company in the world and also does not require borrowed capital to grow. The other more obvious inflation. Hedges are gold, cryptocurrencies and real estate.

All of these assets are independent of the us dollars movements. However, buffett, as most of you know, is against gold and cryptocurrencies as investments for one. He said that cryptocurrencies have no value, and when it comes to gold, he once said that it won't do anything except look at you. Real estate is slightly different for buffet, as buffett has actually been looking at real estate, but he has stated that berkshire hasn't found.

Anything in real estate in a long time he went on to say that we may never, but who can tell overall, i do think that investors should be prepared if inflation picks up in the short and long term. However, on the other hand, there are some deflationary forces going on, such as innovation, forcing traditional competitors to decrease prices and the potential for a crash in commodity prices. In my opinion, most investors should look to hedge their portfolios against potentially devastating inflation rates. After all, there are no certainties in the stock market.

With that being said, investing has become more important than ever in today's complicated macroeconomic environment. I recently published a detailed stock report on one investment that i am initiating large purchases in on my patreon. Not only that, but i can confidently say that this company fits all the criteria that i just mentioned, including high free cash flow numbers and profit margins. If you're interested in this, as well as my buy and sell alerts, my valuation spreadsheets, my new 25 000 portfolio, which i have a goal of growing to hundred thousand dollars, my main portfolio future, buy and sell reports and more check out my patreon in the first Link down below, let me know what you think about upcoming inflation in the comment section below and what you are currently doing.

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