Collection: Warren Buffett - #333 'The Best & Worst Business To Have During Inflation'
[Transcript]
AUDIENCE MEMBER 00:00
Earlier this morning, you discussed policies that have eroded, and that threaten to continue to erode, the U.S. dollar.
In some of your earlier letters to shareholders, you warned about the dangers of inflation and cautioned that shareholders should fully take inflation into account when evaluating the performance of a business.
To what degree do you expect a large decline in the value of the dollar to trigger inflation that would adversely impact Berkshire’s equity holdings and its businesses?
And to what extent should we calibrate Berkshire’s overall performance against the backdrop of a weakening dollar?
WARREN BUFFETT 00:42
Well, we think, by and large, we have businesses that will do pretty well in inflation. But inflation destroys value, but it destroys it very unequally.
The best business to have during inflation is one that retains its earning power in real dollars without commensurate investment to, in effect, fund the inflation-produced nominal growth.
The worst kind of business is where you have to keep putting more and more money into a lousy business.
In effect, the airlines have been hurt by inflation over the last 40 years, because now they have to put a whole lot of money in a lousy investment, which is a plane, compared to 30 or 40 years ago.
And they have to stay in the game. They have to keep buying new planes. And the new planes cost far more now, and the returns continue to be inadequate.
So the best protection is a very good business that does not require big capital investment.
And, you know, the best investment at all — of all — I mean, if you’re the leading brain surgeon in town or the leading lawyer in town or the — whatever it may be — you don’t have to keep re-educating yourself to be that in current terms.
You bought your expertise when you went to medical school or law school in old dollars, and you don’t have to keep reinvesting. And you retain your earning power in current dollars.
We — Charlie and I are always suspicious that inflation will regain some of the momentum it had a couple of decades ago. We always think it’s in sort of remission.
We thought the talk about deflation was total nonsense. And certainly, the trade picture is one that you would think would accentuate any inflationary trends that might otherwise be experienced. I mean, obviously, the price of oil in euros has gone up far less than the price has gone up in dollars.
And you and I are buying gasoline in dollars, so we have seen a bigger increase in our fuel costs because of the decline of the dollar than we would’ve seen if we lived in Europe, or some other — or Australia, for that matter.
So, it’s — inflation is always a factor in calculating the kind of investment, the kind of business, that we want to buy. But it doesn’t — it isn’t like it crowds out all other factors. I mean, it’s always been with us. We’ll think about it always.
See’s Candy has done fine during an inflationary period because it does not have huge capital investments that have to be made in current dollars.
Other businesses we have, you know, if we’re — the public utility business, for example — it costs a lot more money to maintain capital expenditures now in dollar terms than it would’ve 30 years ago.
So you have to keep putting more and more money into a public utility. And you’d better hope that the rate of return allowed is commensurate in times of high inflation the same way that it might have been in low inflation with a lower rate of return.
Charlie?
CHARLIE MUNGER 04:17
Yeah. Well, so far, the facts that are driving the dollar down in relation to other currencies have been restraining inflation in the United States.
In other words, it’s the competitive export advantages of the other people that are — that have so far restrained inflation here. So, it’s —
WARREN BUFFETT 04:39
Yeah, you’re paying less for shoes. You know, we got killed in the — in parts of our shoe business.
And 30 years ago, of the billion-plus pairs of shoes used in the United States, a very high percentage were made here. And now, virtually none are. But if they were all being made here, you would be paying more for shoes. There’s no question about that.
(Source: https://buffett.cnbc.com/2005-berkshire-hathaway-annual-meeting/)
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