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Short filmTranscript
00:00From raw material purchases by Berkshire subsidiaries, are you seeing signs of inflation beginning to increase?
00:06We're seeing very substantial inflation. It's very interesting.
00:08I mean, we're raising prices. People are raising prices to us.
00:13It's being accepted. The costs are just up, up, up.
00:16Because the government, Wall Street, the Federal Reserve has a vested interest in the public not understanding how bad inflation is.
00:23In fact, one of the ways the Fed's been able to justify creating more inflation is because they claimed we didn't have enough of it.
00:29It's an economy, really. It's red hot.
00:32There is a point where it's dangerous.
00:34My attitude with something as big and dangerous is to stay a long way away from it.
00:39We're still not completely out of the pandemic.
00:41There's uncertainty that comes from that, and that uncertainty is going to affect economic activity, and we're going to have to deal with that in some way.
00:47At the end, if you print too much, you end up in something like Ben's oil.
00:52This is Warren Buffett, one of the most successful investors out there.
01:01After taking over Berkshire Hathaway in 1965, he has averaged a mind-blowing average annual return of 20%.
01:10Basically doubling the average return of the S&P 500, and that's including its dividends.
01:15So, just to put that in perspective, over all this time from 1965 to 2020, the S&P 500 would've gave you a 23,454% return.
01:27Sounds pretty nice, right?
01:28Well, you know what the return Warren Buffett has made over that time?
01:322.8 million percent.
01:34So, yeah, he's pretty good at what he does.
01:37Whether you agree or disagree on his investing strategies, you gotta hand it to him.
01:42The man knows what he's talking about.
01:43But as we all know, we're dealing with some pretty difficult market conditions at the start of 2022.
01:50For one, we're dealing with a massively overvalued stock market.
01:54This is what I like to call the Buffett indicator.
01:56It's just the composite market value to GDP.
01:59This is the historical trend line right here.
02:02And as you can see, we are way overextended above the trend line.
02:06And this isn't exactly a gradual increase either.
02:09So, I don't know how you are taking that, but to me, it looks like the market is a bit
02:14overvalued at this point.
02:16Then there's the S&P 500 PE ratio.
02:19You can see where the internet bubble popped.
02:21You can see where the 2008 financial crisis ended up.
02:24But look where the historical average is.
02:27Way down here.
02:28Look how extended we are right now.
02:30Now look, the market could easily break through this chart and keep skyrocketing up, creating
02:35new record highs.
02:37Nobody knows what the market is going to do.
02:39I'm not a professional financial advisor, but I do like to analyze the information that
02:44is given to me.
02:45Then there's the whole coronavirus pandemic thing and different variants coming from every
02:49single corner.
02:50Hey, hey, hey, hey, which basically gives the government the go-ahead to print infinite
02:57amounts of money, increasing the inflation rate to a 39-year high, rising 7% in 2021, compared
03:04to the average 2%, which is a pretty good indicator that the Fed is going to slowly start raising
03:09interest rates.
03:10And we all know what happens to the stock market when the interest rates start rising.
03:14So with all this chaos, what is Warren Buffett buying?
03:21What stocks is he staying away from?
03:23To know the answer, we have to take a deeper dive into trading around inflation.
03:27It's a fascinating time.
03:28We've never really seen what shoveling money in on the basis that we're doing it on a fiscal
03:38basis while following a monetary policy of something close to zero interest rates.
03:42It is enormously pleasant, but in economics, there's one thing always to remember.
03:48You can never do one thing.
03:50You always have to say, and then one.
03:52That interview was in May 2021, right before the major increase in inflation.
03:57And after hearing that interview, you can kind of tell Warren Buffett predicted this whole
04:01inflation scenario occurring.
04:03If you have 0% interest rates and you have a huge amount of money printing, of course there's
04:08going to be a rise in inflation.
04:10In order to understand inflation, we have to understand investing.
04:14You need to be thinking of investing like this.
04:16You are essentially taking buying power and investing it into something to potentially get
04:21more buying power.
04:22So say if we had enough capital to buy 100 boxes of Cheez-Its.
04:26Not a sponsor, but hey, if you work for Cheez-Its, hit me up.
04:29So you have 100 boxes of Cheez-Its right now.
04:32But you want to invest to be able to buy more Cheez-Its in the future.
04:35So you invest.
04:37After two years of investing, you got a 20% return on your Cheez-Its.
04:41So now you can buy 120 boxes of Cheez-Its.
04:45But you know what happens if there's a 10% annual inflation?
04:49Not good things.
04:50Even though your investment over two years gave you a 20% return, there was still a 10% inflation
04:56rate.
04:57Which over two years would equal 20%.
05:00So even though you made a 20% return, there's 20% inflation.
05:04Which means your money is worth 20% less.
05:08Making your quote unquote investment not really an investment at all.
05:12And you're still left with the same amount of money you had before.
05:15Meaning basically you wasted two years of buying power.
05:18Which could have been used on some better investments that would have actually made use of your buying
05:22power.
05:23So investing during high inflation is a real bad experience.
05:27Because if your investments are increasing, technically you could still be losing money.
05:31Almost as if you were walking up an escalator that was going down.
05:35You wouldn't be getting anywhere.
05:37But how are we supposed to invest when inflation is on the rise?
05:40Well if we head back all the way to 1982, Warren Buffett had to deal with a similar issue.
05:46Inflation was just cooling down from a 15% inflation rate.
05:50So he had to invest during that struggling time as well.
05:53What did he invest in?
05:54Well luckily, Berkshire Hathaway is a public company.
05:57So we can see the exact message he sent to all of his shareholders back in 1982.
06:03He said this exact message.
06:05Such favored businesses must have two characteristics.
06:08One, an ability to increase prices rather easily.
06:12Even when product demand is flat and capacity is not fully utilized.
06:16Without fear of significant loss of either market share or unit volume.
06:20Two, an ability to accommodate large dollar volume increases in business.
06:24Often produced more by inflation than by real growth.
06:28With only minor additional investment of capital.
06:31So cool.
06:32We can read the message he sent to all of his shareholders.
06:34But what does the message actually mean?
06:37Well first let's take a deeper look into number one.
06:39In number one he's simply saying he's interested in companies that can increase their prices without any consequences.
06:46Which that in itself is a very powerful tool against inflation.
06:50But you would think if companies increase their prices, the consumer would just head to a different company.
06:56So what companies can just increase their prices at any moment and get away with it?
07:00Well, that blue text bubble is a hint.
07:03Because one of those companies is Apple.
07:06Whether you're on team blue bubble or team green bubble.
07:08Apple has pretty much been getting away with legal highway robbery.
07:12I mean iPhones are basically selling for the prices of cars these days.
07:16If you look at this chart, you can see the average iPhone selling price in 2012 was around $600.
07:22In 2018, it raised all the way to $800.
07:25And that's just 2018.
07:27Think of what it's at now.
07:28And you know why they increase prices like this?
07:30Because they can.
07:31They can increase their prices all they want.
07:34Just because of how loyal their fan base is.
07:36The average user, if they have an Apple phone right now, they're likely to get another Apple phone in the future.
07:42Now, of course, Apple can't just increase their latest iPhone price by $1,000 randomly.
07:47They have to do it in little increments.
07:49To go basically unnoticed and have the consumer not care too much when prices do increase.
07:54Can you think of any other companies like this?
07:57Have you ever met a die-hard Coke fan?
07:59If you even have a Pepsi can anywhere in the room, they freak out.
08:03Let alone want to drink it.
08:04Well, Coke, the company, has definitely realized this.
08:07They've noticed if they increase their prices, if you drink Coke, you're only drinking Coke.
08:13And you know what companies Warren Buffett is holding right now?
08:16Apple and Coke.
08:17And pretty big position sizes too.
08:19One of the biggest strategies of investing during high inflation is investing in companies that have a strong competitive advantage.
08:27They can increase prices higher than the competition and still get consumers picking them.
08:32So we went over number one.
08:34But what does number two mean?
08:35In this message, he's basically saying he wants companies that can generate a lot more cash without needing to spend a lot of cash.
08:42If you can't pass on the cost to your consumers like Apple and Coke do, you're going to have to cut the cost yourself.
08:48So for instance, if I say, I don't know, Kia wants to sell more cars, they're going to have to make more factories and hire more employees to make more cars.
08:57But whereas, say, a digital company like Google or Facebook, they can just increase their frequency of their ads at any time, making more money with no additional costs.
09:06So when you're scrolling through Instagram, instead of seeing two ads, you're seeing three.
09:11And the important thing about this is they can do this extremely easily and more importantly, for cheap.
09:17They don't have to make more factories.
09:19They don't have to hire more employees.
09:20They just simply type in some code and they're now making more money.
09:24In times of inflation, you should be looking for companies with big competitive advantages and companies that can scale up at a low cost quickly.
09:32If you can find those, you'll do just fine.
09:34So that's one strategy.
09:36But maybe you're not the type to look for companies like this.
09:39Well, Buffett has a different strategy for you.
09:41The best single thing you could have done on March 11th, 1942, when I bought my first stock, was just buy an index fund and never look at a headline, never think about stocks anymore.
09:54Just like you would do if you bought a farm.
09:56You just buy the farm and let the tenant farmer run it for you.
09:59And I pointed out that if you'd put $10,000 in an index fund that reinvested dividends, and I paused for a moment to let the audience try and guess how much it amount to,
10:10and it would come to $51 million now.
10:13I really love that interview.
10:15He's saying there that no matter rain, sleet, or snow, just keep investing into index funds.
10:20Don't read headlines.
10:21Don't listen to the news.
10:22Just stay on your regular schedule of investing into an index fund.
10:26If you invest normally in a scheduled manner into an index fund, you're going to get the average mean of the market.
10:32So just because the market is in a downtrend now and looks hideous, if we zoom out, it just looks like a normal dip.
10:38The nature of index funds are beautiful.
10:41You're basically acknowledging, hey, I don't know enough about picking companies, and I don't know enough about picking them at good times.
10:48But what I do know is there's a 10% annual return with index funds.
10:52And there is absolutely no problem with trading like that.
10:56It's extremely hard to beat the returns of an index fund.
10:59So if you're an active investor, be patient.
11:01Don't force anything.
11:03Wait for your time and get in when you can be confident.
11:05If you're a long-term trader or a passive trader, just continue as if nothing happened.
11:11But Buffett has one more piece of advice, and it's a pretty important one too.
11:15But given the fact that we're dealing with fairly high levels of inflation in India,
11:19what would your advice be to people who are investing?
11:22What should they change?
11:23What should they do?
11:24Yeah, well, inflation, Cain said it many years ago that it's an invisible tax that only one man in a million really understands.
11:33And it's a tax on people that have had faith in their currency that the government's issued.
11:39The best protection, the best investment against inflation is to improve your own earning power, your own talents.
11:46Very few people maximize their talents.
11:48And if you increase your talents, they can't tax it while you're doing it.
11:55They can't take it away from you.
11:57So if you become more useful in your activities, your profession, doctor, lawyer, whatever it may be,
12:06that is the best protection against a currency that might decline at a rapid rate.
12:14And the best investment, passive investment, I think is a good business.
12:22If you own an interest in a good business, you're very likely to maintain purchasing power no matter what happens to the currency.
12:33In this clip, he's more or less saying, investing in a market that is highly inflated is a pretty shitty time.
12:39And it makes it a lot harder to make money from investing.
12:42So he makes the point of investing into yourself during this time.
12:46So whatever you're doing right now, get better at it.
12:48This way you can try to increase your buying power so when the market is back to normal, you'll be in a good place to take advantage of it.
12:55Warren Buffett doesn't buy overvalued stocks.
12:58He just continues to accumulate cash and waits patiently.
13:01Actually, Berkshire Hathaway's cash has gone from $84.4 billion in 2016 to $149.2 billion in 2021.
13:10So I get it.
13:11It's no fun.
13:12But Charlie Munger said it best.
13:14You don't make money when you buy, and you don't make money when you sell.
13:18You make money when you wait.
13:19So it's a really annoying time right now.
13:22There's no getting around it.
13:23But what separates a great trader from a bad trader is a bad trader loses money during bad markets.
13:28Then when the time comes when the market is back to normal, they have no buying power.
13:32A great trader can stay alive during the bad markets so they can invest heavily when the markets are back to normal.
13:38It's pretty simple.
13:39I know.
13:40But it's an important lesson to embed in your brain.
13:42So what do you think the markets are going to do?
13:44Do you think the bear market that we've been seeing for the past couple weeks is the end?
13:48Or do you think it's going to keep on dropping?
13:50Let me know in the comments.
13:51I really want to know what you guys think.
13:52Do you want to know what hedge funds are even billionaires like the man himself are investing in?
13:57Watch this video.
13:58I tell you exactly how to see any hedge fund's portfolio in 16 seconds.
14:03Like, literally.
14:04The video is 16 seconds long.
14:06Take 16 seconds out of your day, and it might just give you the information needed to make thousands of dollars.
14:12Sounds like a pretty good deal to me.
14:14Thanks for watching, and I'll see you guys next time.
14:18I'll see you next time.
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