"Warren Buffett explains how to invest in stocks when inflation hits markets"

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Serie1926
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"Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by Serie1926 » Mon Feb 12, 2018 11:59 am

"5. Focus on companies that generate rather than consume cash.

"Our acquisition preferences run toward businesses that generate cash, not those that consume it. As inflation intensifies, more and more companies find that they must spend all funds they generate internally just to maintain their existing physical volume of business. There is a certain mirage-like quality to such operations. However attractive the earnings numbers, we remain leery of businesses that never seem able to convert such pretty numbers into no-strings attached cash."

https://www.cnbc.com/2018/02/12/warren- ... rises.html

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nisiprius
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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by nisiprius » Mon Feb 12, 2018 2:56 pm

Once again, someone who is not Warren Buffett claims to be able to channel his insights and translate them into specific advice for retail investors. The author is described merely as a "CNBC editor," not a colleague or friend of Buffett's who might understand Buffett's methodology in a deep way.

The first five points are merely "inflation is bad," with no message about what that means in terms of "how-to."

With regard to "Our acquisition preferences run toward businesses that generate cash, not those that consume it." How does that apply to me? I'm not planning to acquire any businesses in the foreseeable future, how about you?

Finally, the gist of points 5 through 9 might be called "stock-picking/business-picking the Buffett way." But does Buffett recommend that retail investors emulate his strategies? No, he does not. He doesn't even recommend that they buy Berkshire Hathaway stock. He recommends that they buy S&P 500 index funds.

Now, if Mr. Rosenbaum were to interview Mr. Buffett and ask him, "Tell me, Warren, are you feeling greedy today or are you feeling fearful today?" that might be mildly interesting.
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lazyday
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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by lazyday » Mon Feb 12, 2018 3:21 pm

Thanks for the article.

His thinking may have changed a bit since he wrote that #5 you quoted, considering BRK now owns utilities and a railroad, businesses which require new capital over time. In the last annual meeting he or Munger might have said or implied something about preferring companies that don't need capital, but they are too expensive.

From #4 on bad businesses:
inflation acts as a gigantic corporate tapeworm. That tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism. Whatever the level of reported profits (even if nil), more dollars for receivables, inventory and fixed assets are continuously required by the business in order to merely match the unit volume of the previous year. The less prosperous the enterprise, the greater the proportion of available sustenance claimed by the tapeworm.
I never understood the accounting mechanism by which inflation hurts low margin companies which need new capital over time. Maybe it's to do with a delay in passing on price increases?

Here's an old thread on Buffett and inflation: viewtopic.php?t=41968

Ron Scott
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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by Ron Scott » Mon Feb 12, 2018 6:17 pm

lazyday wrote:
Mon Feb 12, 2018 3:21 pm
I never understood the accounting mechanism by which inflation hurts low margin companies which need new capital over time. Maybe it's to do with a delay in passing on price increases?
There is no end to the variety of headaches that plague low margin businesses. Timing/cash flow, as you indicate, is a constant issue, robbing management time throughout the year. But understanding your ABILITY to raise prices is even worse. And if you happen to have competitors who are more efficient than you they can use that as leverage to crush you during periods of rising inflation.

Inflation magnifies the problems of distasteful kinds of businesses. But any business with high variable costs are subject to similar headaches. Ditto those with many competitors and shallow moats.

Give me a business with execs who know their customers and can resell the output of one big fixed expense again and again, and I'm a happy camper. The kind of business where you break even on customer #10 and everything else is gravy.

Buffet knows this and finds it hard to do. We don't stand a chance...

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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by lazyday » Tue Feb 13, 2018 5:50 am

I suppose if all competitors selling a similar product/service have to be slow in passing on price increases in order to avoid upsetting customers and hurting sales, then all companies will have earnings suffer. And I guess the hit to earnings will be proportional to sales dollars, so the low margin companies will suffer much more.
Ron Scott wrote:
Mon Feb 12, 2018 6:17 pm
And if you happen to have competitors who are more efficient than you they can use that as leverage to crush you during periods of rising inflation.
I suppose that if a high margin company was thinking about lowering (real) prices to kill off competition, a great time to do it is when the competition is already suffering.

3funder
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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by 3funder » Tue Feb 13, 2018 8:15 am

For the average Boglehead, I imagine the answer is, "Stay the course." For those who invest in individual stocks, I suppose Mr. Buffett's advice is about as good as it gets.

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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by Ron Scott » Tue Feb 13, 2018 10:00 am

lazyday wrote:
Tue Feb 13, 2018 5:50 am
I suppose that if a high margin company was thinking about lowering (real) prices to kill off competition, a great time to do it is when the competition is already suffering.
Yes, and there's a corollary.

High margin businesses are provocative. Regardless of inflation, if you have a strong competitor with high margins you might be able to introduce a lesser but still valuable product ('good enough for rock and roll") and take some market share. This was the bain of my existence for 36 years. I'd have the high-priced acknowledged super-product and the competition would sell a cheaper knock-off. Sometimes I'd be forced to lower price for selected customers and sometimes I'd lose some share. I never underestimated customers' willingness to eat yesterday's bread if it would save them a few bucks.

'cest la vie. Living in a highly competitive environment builds character...

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Dale_G
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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by Dale_G » Tue Feb 13, 2018 2:11 pm

As an inflation hater, I couldn't resist:
inflation acts as a gigantic corporate consumer tapeworm. That tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism. Whatever the level of reported profits income (even if nil), more dollars for receivables food, inventory housing and fixed assets transportation are continuously required by the business consumer in order to merely match the unit volume living standard of the previous year. The less prosperous the enterprise consumer, the greater the proportion of available sustenance claimed by the tapeworm.
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not4me
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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by not4me » Wed Feb 14, 2018 9:45 am

nisiprius wrote:
Mon Feb 12, 2018 2:56 pm

Finally, the gist of points 5 through 9 might be called "stock-picking/business-picking the Buffett way." But does Buffett recommend that retail investors emulate his strategies? No, he does not. He doesn't even recommend that they buy Berkshire Hathaway stock. He recommends that they buy S&P 500 index funds.
Do you happen to have a reference for him saying 'retail investors' should buy s&p 500 index? I've often seen this attributed to him, but as you say people tend to try & "channel his insights". I've seen him say his recommendation for his wife after he dies is to go into a certain combo & that IF someone buys s&p500 that over the long term they'll be "just fine".

I'll readily admit I might post something like that & not be able to find the reference, so no worries if not readily available. Doesn't mean he didn't say it!

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nisiprius
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Re: "Warren Buffett explains how to invest in stocks when inflation hits markets"

Post by nisiprius » Wed Feb 14, 2018 3:38 pm

Do you happen to have a reference for him saying 'retail investors' should buy s&p 500 index?
2016 shareholder letter
The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.
So that pins down "both large and small." He doesn't actually say "retail investors" but he does say "small investors."

From the same letter,
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.
So I think that pins down "recommend" and "low-cost S&P 500 index fund."

However, he did not say, in so many words, "I do not recommend that retail investors try to emulate my strategies," nor does he say "I do not recommend that retail investors buy Berkshire Hathaway stock." So perhaps I went beyond what Buffett said.

Where the fun begins is trying to decode what Buffett meant, specifically, by an "S&P 500 index fund." Did he mean "do not invest in international stocks" and "do not invest in small-caps?" I haven't seen anything that would resolve this question.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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