Unlike the headline-driven reports in the media these days here is my take on a currently ignored but very important investment topic, inflation.
As a long-term investor your ultimate goal should be a positive returns after tax and inflation.
In other words: you should not care whether or not you outperform an index- you want to increase your wealth in real terms after tax!
While you cannot control taxes the government deducts from your investment income, you can definitely structure your investment strategy with the goal to protect your wealth against inflation.
Believe me, significant inflation is quite likely around the corner.
To get a quick overview about the inflation situation you might want to read Warren Buffett’s Q&A at this year’s shareholder meeting of his company Berkshire Hathaway:
As a side note: the Q&A is not only worthwhile because of Warren’s views on inflation it is also full of priceless advice on life and wealth building in general.
Back to inflation.
In order to best protect your investments from inflation, I would like to make the case for high-quality companies with decent pricing power.
Companies with pricing power can be divided into two groups:
Firstly companies that are rich in commodity or real assets, like my long-term favorite US natural gas company Contango Oil and Gas as recommended to my subscribers in September 2009.
I still think its a strong buy as its value is going to move up nicely if inflation starts rising and currencies depreciate. The same is applicable to British real estate investment company London & Stamford I have been recommending for some time.
While governments around the world can easily switch on the money printing press, I am not aware of any way to print Natural Gas or Real Estate!
Secondly companies that produce products of everyday use. Here I am thinking of beer brewers, food makers, telecommunication companies or pharmaceutical companies. You might want to take advantage of the recent weakness in the stock prices of Deutsche Telekom, Vivendi or CCA Industries (other recommendations) to beef up your long-term strategic investments.
To make this short story shorter: if you want to make your portfolio inflation-proof, look for cheap entries into healthy companies that are likely to show strong profit growth – no matter how much the government inflates our money.
Tim du Toit is the editor of Eurosharelab. Kindly note that this blog is published for information purposes and is not investment advice. Please refer to our disclaimer. To subscribe to our weekly newsletter, click here.
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