Investing with Inflation


Chief Concern of Inflation

A chief concern with inflation is to avoid holding too many bonds. Bonds are forms of debt instruments and high inflation will out run the value of the debt and create a negative return scenario.

Equities can perform a better hedge against inflation then cash or bonds.

Commodity vs Non-commodity companies

“Where costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous.” -Warren Buffett

Commodity company
A company whose products or services are not unique special or protected in some way.  These kinds of companies compete on price and don’t have a protective moat like a non-commodity company.

Non-Commodity company

“[There is the] constant struggle of every vendor to establish special qualities of product or services. This works with candy bars (customers buy by brand name, not by asking for a “two-ounce candy bar”) but doesn’t work with sugar (how often do you hear, “I’ll have a cup of coffee with cream and C & H sugar, please”).” -Warren Buffett

Here customers either need the product, or there is no real competitor, or the reputation of the product is such that people will keep buying it. Suppliers and distributors have no choice but to stock the product or people will go elsewhere.

Characteristics of a non-commodity company include:

  • brand name that customers prefer
  • sustainable competitive advantage or moat

“The might of their brand names, the attributes of their products and the strength of their distribution systems gives them an enormous competitive advantage, setting up a protective moat around their economic activities. The average company, in contrast, does battle daily without any means of protection.”

-Warren Buffett