Rising Inflation, Volatile Market: What Would Buffett Do?

For billionaire Warren Buffett, investing in low-cost index funds and pursuing value over the long term are the best ways to beat inflation and weather turbulent times.
May 11, 2022

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Beginner and experienced investors are navigating an uncertain investing environment affected by inflation, war and a pandemic.

Financial clarity and strategy are in demand, as shown by the thousands of Berkshire Hathaway shareholders who met April 30 in Omaha, Nebraska, for their annual conference or watched the livestream on CNBC.

Berkshire Hathaway’s Chairman and CEO, Warren Buffett, one of the richest men in the world, is a 91-year-old investor and business legend known for his strategic financial advice and prowess. Here’s what you can learn from him about inflation, index funds and value investing, and what you can do today to level up your financial portfolio.

1. Inflation is out of investors’ control

Inflation “swindles almost everybody,” Buffett reminded investors on April 30. The prices of goods and services are rising, meaning the U.S. dollar can buy less than it bought a year or two ago.

U.S. families already dealing with decades of wage stagnation now are contending with rising food, gas and shelter prices, to name a few. And while market changes and global events are out of an individual investor’s sphere of influence, it’s wise for consumers to focus on what they can control. In most cases, that means staying the course with your investing strategy — after all, as Buffett would advise, investing over the long term is typically the best way to beat inflation.

2. Index funds can provide simple, effective diversification

Buffett is a big fan of index funds, investment bundles that mirror a particular market index, such as the S&P 500: “In my view, for most people, the best thing is to do is owning the S&P 500 index fund,” said Buffett in May 2022.

Low-cost index funds typically charge lower fees than actively managed funds and allow you to buy a diversified slice of a market or industry. In practical terms, it spreads out the risk of your investments, which is especially important during volatile times.

In contrast, “stock picking,” or actively managing a financial portfolio by buying individual stocks, can be expensive, time-consuming and risky. And according to San Francisco-based financial advisor Kevin Cheeks, it often doesn’t pay off: “Most professional money managers can’t consistently beat the market. They might have a few good years, but 70 to 80% of fund managers will underperform the stock market.”

The data proves that: S&P Dow Jones Indices reported nearly 80% of actively managed funds underperformed the S&P Composite 1500 in 2021. “Paying higher costs for something that may not perform well over time doesn’t add as much to your portfolio,” says Cheeks.

When asked about stock picking on April 30, Buffett said: “We [Buffett and Charlie Munger, Berkshire Hathaway vice chairman] haven’t the faintest idea what the stock market was gonna do when it opens on Monday. We never have.” He continued: “I don’t think we’ve ever made a decision where either one of us has either said or been thinking we should buy or sell based on what the market is going to do. Or, for that matter, on what the economy’s going to do. We don’t know.”

To get started with index funds, pick an index like the S&P 500, Dow Jones Industrial Average, Nasdaq Composite or Wilshire 5000 and a fund that tracks that index. Many investors select index funds by their expense ratio, or your annual fee expressed as a percentage of your investment. Then when you’re ready to buy, you can do so through an investment account such as a brokerage account or an IRA. Employer-sponsored retirement plans, such as 401(k)s, may also offer access to index funds.

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3. Value investing can be a solid strategy

“Buy into a company because you want to own it, not because you want the stock to go up,” Buffett told Forbes magazine in 1974. Assessing a company's value is one strategy for choosing where and when to invest.

Value investing means buying high-quality stocks, ideally at value prices, and holding them for years.

There’s also investing in line with your values, which involves considering your social, faith, environmental or moral beliefs when you invest.

Buffett has done pretty well for himself by following both strategies. For example, at this year’s annual conference, Buffett announced Berkshire Hathaway had purchased 15 million shares of gaming company Activision Blizzard. The acquisition is one of the more recent examples of Buffett’s strategy of picking undervalued investments at an attractive price instead of choosing stocks based on high growth potential.

In the case of Berkshire Hathaway’s beliefs, Buffett has prioritized four main areas: insurance, Apple, railroads (BNSF Railway) and energy. In his 2021 Letter to Shareholders, Buffett describes the railroads as “the number one artery of American commerce” and “an indispensable asset for America as well as for Berkshire.” A belief in the services railroads provide and their impact on the environment are central to Buffett's investment. “If the many essential products BNSF carries were instead hauled by truck, America’s carbon emissions would soar,” he wrote.

Even for those with $100 or $1,000 to invest, investing based on your values can still be an important consideration. Cheeks helps clients make a range of value-based choices as they invest. “Let’s focus on what you need to accomplish. And then let’s look at how we can do that through a particular lens like being impactful or charitable,” he says.

If you're interested in value investing, you'll need to research underpriced and overlooked companies in today's stock market — which is easier when the market is largely down, as it recently has been.

As for investing in line with your values, many brokers have screening tools that allow you to filter index funds or other investments based on environmental, social and governance (ESG) business practices.

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