April 6, 2022
Once relegated to commentary among economic officials and industry professionals, inflation has reached consumers and even students.
There has been a noticeable increase in the price of nearly everything we consume on a daily, weekly and monthly basis. It can be seen in grocery stores, at gas pumps and even in your bank account. When asked by CNBC, more than half of chief investment officers, equity strategists, and portfolio managers shared that inflation was their biggest concern.
The markets are down, but you can’t stand pat, your money is losing value month after month just sitting in a savings account. So what can investors do?
These days, owning a portion of a successful business or stocks isn’t just a luxury, it is a necessity. Owning stocks is the most effective way to beat inflation, so long as you are buying the right stocks.
Higher costs and inflation are bad news for consumers and everyday people, but can actually be beneficial for businesses, because they can pass on higher costs to their customers. Higher costs for consumers leads to more profits and higher stock prices, making stocks the sole asset class to beat inflation on a relatively consistent basis.
According to a Goldman Sachs study, “U.S. equities have outperformed inflation 100% of the time over any 19-year window.”
What are the magic words?
Superinvestor Warren Buffet (you may have heard of him) believes that “pricing power” are the most important factor when evaluating a business to invest in. These two magic words refer to the business’ ability to pass rising costs onto consumers without negatively impacting sales.
The bottom line is there are things that consumers cannot go without. And those businesses will in turn have the highest pricing power.
For example, no matter how expensive it became to feed your family, you would still be heading to your local grocery store to fill the fridge and put food on the table. Vehicles will always need fuel. Homes will always need heat; you get the picture.
These are the types of businesses you want to invest in when inflation is running rampant.
Swiss Bank UBS is another institution that looked into the performance of stocks with pricing power since 2010. These stocks dramatically outperformed others when facing high degrees of inflation.
Companies with low pricing power are forced to cut costs or take a loss and those with pricing powers pass those costs onto consumers without negatively impacting profitability.
In the short term the markets will fluctuate based on the emotions of the investors buying and selling frantically, but in the long run smart investors will put their money where they know it will be the safest.