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Creating a Portfolio Like Warren Buffett: A High-Return Investment Strategy by Jeeva Ramaswamy

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CHAPTER 18

Stock Research Checklist—Inflation

Inflation is a kind of tax in this world. As Warren Buffett puts it:

The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax, but doesn’t seem to notice that 5 percent inflation is the economic equivalent.1

Is the Company Able to Raise the Price of the Product or Service According to Inflation?

In the normal course of business, the input of raw materials, people’s wages, cost of maintenance, and capital investment in the infrastructure increase over time because of inflation. If you are looking at a company that can raise the price of its products to reflect the input costs, then you are looking at a good business.

Most businesses operate in competitive industries and will not be able to increase the price of their products. If they do, they will lose market share to their competitors. In those situations, the company needs ...

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