2022: Can stocks keep pace with inflation?

BECKY QUICK: This question comes from Phillip King. He writes, “In the ’70s you wrote an article entitled, ‘How Inflation Swindles the Equity Investor.’ You said that stocks cannot keep pace with inflation, because companies cannot increase their return on equity. Do you believe that this is still the case?

WARREN BUFFETT: Yeah. And of course bonds can swindle the equity investor too. (Laughs) Inflation, I should say, swindles the bond investor too. And it swindles the person who keeps their cash under their mattress. It swindles almost everybody. And the problem, if you have a business that doesn’t take any capital, and let’s just say the dollar depreciates 90% or something, so things cost ten times as much.

If it doesn’t take any capital you can charge ten times as much, and you’ve kept your relative position. But most businesses take some capital. If our utility business — just to say that the dollar is worth 1/10th some years hence from now, we have to have ten times the capital investment, basically. And we get paid a return on that, but we have forced capital investment to essentially keep in the same place.

And I wrote an article that related to that, and I will tell you one famous story, which you will all sympathize with. In that I wrote that story for Fortune, and when I finished it, it was about 7,000 words. And Fortune didn’t like publishing 7,000 words, and they had my friend Carol Loomis explain that to me, knowing that I would pay more attention to her than anybody else.

But being stubborn and male, I said, you know, “Every word is precious,” and they can either run it or not. So then they sent an editor, a very nice guy, out to Omaha. And this guy explained to me that just wasn’t right to use that many words. And I said, “Well, that’s fine, but if you don’t do it, I’ll write it someplace else.” Very disgusting behavior on my part.

And then it was beginning to bother me a little, so I sent it to my friend Meg Greenfield. And Meg was a great, great, great editor at The Washington Post, and we were very, very good friends. Wonderful woman. And Meg, who was tough as nails with most writers, but she was kind of nice. She didn’t want to really hurt me too much. So I said, “Well, Meg, what do you think?” And she said, “Well, Warren,” she says, “You don’t have to tell everything you know in this article. (Laughter)

And it made the point. And so I write that article shorter, and I say more or less the same thing. You know? And you’re better off — if you really could have a totally stable unit of monetary use for the next 100 years, it would be better for business and investors in general.

Charlie? No? We will go to station six.

CHARLIE MUNGER: Inflation — the question is how much. And the question is whether you can decide that 2% and keep it — the answer is nobody knows. You know? I mean you do not know, and nobody knows. You can listen to all kinds of stuff, but nobody knows how much inflation there will be over the next ten years or 20 years or 50 years or next month.

And people talk about it all the time, because you’re interested in knowing the answer to your question. And they don’t know the answer, but there are a lot of people that will tell you they know the answer if you pay them enough. And other people that will tell you for nothing, because they think it enhances their prestige and makes them more valuable and all that.

But the answer is they don’t know. And we don’t know either. The best protection against inflation, though, still is your own personal earning bar. If you play the violin very well, you will do reasonably well during inflation. I mean play it better than other people, people will pay you for doing that. All kinds of things. So your skills will not be taken away, and your money may be.

OK, station six. Oh, wait a second. Was that —?

Is it Becky next? Becky?

BECKY QUICK: That’s right. It’s station six.