How to Survive Inflation and High Interest Rates, Warren Buffett-Style

Inflation and interest rates are the two big themes on everyone’s minds this year. Inflation eats away at everyone’s purchasing power, but high interest rates balance it out more expensive to rent. Canadians are so concerned about both of these issues that banks are starting to send them emails offering “inflation support.”

If you live paycheck to paycheck, bank solutions might work for you. But if you have disposable income to invest, maybe you should listen to someone else: Warren Buffett.

Warren Buffett is widely regarded as the greatest investor of all time. Others have achieved better returns than he has, but none have achieved comparable returns over such a long period of time. Warren Buffett has doubled the annual return of the S&P 500 over a 60-year period, his cumulative return is 185 times higher than the index. If you are looking invest In times of high inflation, it pays to listen to Buffett. Here are two of his top pieces of advice for investors looking to beat inflation.

Have cash ready to invest

Warren Buffett is notorious for keeping large amounts of cash and Treasury bills on hand. He doesn’t do this because he believes government bonds are good investments — he’s discounted them many times. Rather, it does it because government bonds are liquid assets that can be easily sold to raise money to buy stocks later.

Buy stocks that can do well when inflation is high

As we’ve seen, Warren Buffett likes to keep cash ready to invest. That’s advice worth taking, but it might be a little obvious. What would be really powerful would be to know What Buffett buys when inflation runs hot.

This year, there’s no question what Buffett is buying: oil stocks. Buffett has acquired over 20% of it Western Petroleum already this year and would like to add more. Buffett recently received approval from regulators to buy a full 50% of this company, so we could see a takeover in the future.

Another type of stock Warren Buffett has held during periods of high inflation are bank stocks. Bank of America (NYSE:BAC) is currently the second-largest holding in Buffett’s stock portfolio. It’s worth about 13% of the total portfolio and pays substantial dividends.

Banks don’t make money directly from inflation – in fact, old loans lose value when inflation rises. However, they make money from central banks’ efforts to fight inflation. When interest rates rise, banks pass the cost on to borrowers. As a result, they collect more interest on their loans. Bank of America demonstrates this phenomenon perfectly: In the most recent quarter, its revenue grew 8% and its net interest income rose 24%. The bank’s net income declined, but that was only due to factors on paper such as loan loss provisions (ie money set aside for potential defaults). Improved operational performance.

Overall it was a great quarter for BAC and the release sent the stock up 6% in a single day after the results were released!