In the ’70s you wrote an article entitled, ‘How Inflation Swindles the Equity Investor.' You said that stocks cannot keep pace with inflation, because companies cannot increase their return on equity. Do you believe that this is still the case?
Yeah. And of course bonds can swindle the equity investor too. (Laughs) Inflation, I should say, swindles the bond investor too. And it swindles the person who keeps their cash under their mattress. It swindles almost everybody. And the problem, if you have a business that doesn’t take any capital, and let’s just say the dollar depreciates 90% or something, so things cost ten times as much. If it doesn’t take any capital you can charge ten times as much, and you’ve kept your relative position. But most businesses take some capital.
If our utility business — just to say that the dollar is worth 1/10th some years hence from now, we have to have ten times the capital investment, basically. And we get paid a return on that, but we have forced capital investment to essentially keep in the same place. Inflation — the question is how much. And the question is whether you can decide that 2% and keep it — the answer is nobody knows. You know? I mean you do not know, and nobody knows. You can listen to all kinds of stuff, but nobody knows how much inflation there will be over the next 10 years or 20 years or 50 years or next month. And people talk about it all the time, because you’re interested in knowing the answer to your question. And they don’t know the answer, but there are a lot of people that will tell you they know the answer if you pay them enough. And other people that will tell you for nothing, because they think it enhances their prestige and makes them more valuable and all that. But the answer is they don’t know. And we don’t know either.
The best protection against inflation, though, still is your own personal earning power. If you play the violin very well, you will do reasonably well during inflation. I mean play it better than other people, people will pay you for doing that. All kinds of things. So your skills will not be taken away, and your money may be.
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Nobody knows how much inflation there will be.