Inflation stood at 6.8% in November 2021, the highest level in 39 years. Policy makers and economist are increasingly warning of persistent inflation in the future.
If you don’t position your portfolio correctly, a possible inflationary cycle in the coming years might destruct your wealth. The stock market lost 15% during the 1965-1980 Great Inflation period.
Warren Buffett’s Berkshire Hathaway gained 645% (15.4% annually) during this challenging period. His letters give us very valuable insights into how he was able to achieve this.
In this article, I will provide the three most valuable lessons from Buffett on how to continue generating wealth during inflationary cycles.
At the end of the article, I will discuss a strategy to find great investments for the upcoming challenging market period and one of our favorite picks.
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gesrey/iStock via Getty Images “I t is a good time to retire the term “transitory inflation”. I think the risk of higher inflation has increased.” These words of Fed Chairman Jerome Powell during a testimony on November 30th sent a huge shock in the financial markets. He admitted that inflation has been more persistent than the central bank expected and that an acceleration of tapering will be needed to combat this.
Indeed, the November Consumer Price Index (“CPI”) read-out on December 10 showed an acceleration instead of a slowdown of inflation. Consumer prices increased by a staggering 6.8% year-over-year, the highest level seen in 39 years.
Inflation is soaring at extreme rates for over half a year now and policy makers are sending out increasing warning signs. As such, my prior expectation of persistent inflation, as laid out in the article, “Inflation Non-Transitory? 3 Reasons Why Paul Tudor Jones Might Be Right And How To Position For It” , looks to be unfolding. Investors like you and me should be prepared for a prolonged inflationary period which could be similar to the Great Inflation in the 70s.
A continuation of inflation would likely cause slowing monetary stimuli, a further evaporation of many companies’ earnings and a deterioration of the value of the US Dollar. This poses a significant threat for stock market investors’ wealth. Indeed, the S&P 500 ( SPY ) generated negative real returns during 15-year Great Inflation period.
However, if you position your portfolio correctly, wealth can still be accumulated in such a challenging market environment. Legendary investor Warren Buffett has proven this as he continued growing his wealth by double digits during the last inflationary cycle.
What can we learn from Mr. Buffett’s practices? In this article, I will provide three valuable lessons how he was able to outperform the market so drastically during the 70s. Later, I will discuss how this strategy could best be translated in today’s market environment and share one of our favorite picks. (Source: Insider Opportunities with FRED data) The 70s Great Inflation: Warren Buffett (Berkshire Hathaway) Beat The Market By A Mile
“History doesn’t repeat itself, but it often rhymes” Those who follow my research, know that I’m a big advocate of studying historical information to get a better understanding of current market conditions.
As the likelihood of persistent inflation is increasing, it might be interesting to learn from what happened with the financial market during the last inflationary cycle: the Great Inflation during the 70s.
As in every inflationary period, the extreme increase of prices during the seventies was caused by an imbalance of supply and demand for goods and services.
President Nixon increased money spending for the Vietnam War and his Great Society Initiatives, while encouraging others to spend more money by pressuring the Fed to hold interest rates low. As a consequence, demand for goods and services increased significantly.
In the meantime, the Oil Embargo in the early seventies led to a major decline of oil supply. As such, oil prices approximately ten-folded in a short timeframe, which also pushed the prices of everything else higher.
Nixon kept denying that money printing was a part of the cause of rising inflation and held on to his loose policy. Wharton professor Jeremy Siegel called it “the greatest failure of American macroeconomic policy in the postwar period.”As such, inflation skyrocketed to as much as 14.6% annually, which unfortunately led to a major destruction of purchasing power amongst American citizens. Between 1966 and 1980, the consumer price index more than doubled. Those who fled into the stock market weren’t able to […]