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Guy Spier -> What Types of Businesses Are Inflation-Proof


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I have been thinking about this....

 

I think inflation resisting businesses are probably those that require very little asset , especially little or negative working capital....    That is the business is either non dependent on physical asset or that it moves through the product so quickly it can adapt to inflation quickly. The business model should ideally also have no long term contract with the client.

 

A few ideas

1 specialty / professional consulting businesses - engineering, medicine, legal, accounting , etc. but most of this type of business are private practices can't really buy them

 

2 financial processing firms like FLT , and credit cards, online travel booking,

 

3. Idea generating firms - research firms, marketing firms, IT services, media content generation companies?

 

4. Online news /media

 

5. Certain software firms.

 

Any other thoughts?  Thanks  :)

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I would think since in times of inflation the costs of goods and services rises, a company may be able to raise prices for their services,but will it be above and beyond the rising costs of their raw inputs? Therefore maybe companies will high roe and intangibles like Moody's may do well.  however higher interest rates of an inflationary environment may slow debt issuance and negatively impact volume at Moody's. but a good portion of their revs are derived from software licensing.

 

Also MasterCard and Visa make sense to me because of the moat/network effect, but mainly bc they take a small percentage of each transaction. If the costs of goods shoot up then MA & V are still taking their same percentage, but of a bigger number per transaction, hence more profit for them. The same logic could also be applied to an insurance broker like Aon.

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Visa/MasterCard seem very inflation proof. They must maintain their network though.

 

Real estate is generally good too. Collecting generally increasing rents. Not as good if there is deflation and there is still a big mortgage attached to the property. 

 

I don't have any numbers, but I bet equipment and car rental companies are quite inflation proof. Does anyone have numbers offhand?

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The issue is, IMO, why is the question significant? Does he expect a lot of high inflation in the future?

 

I think given the limited resources (money) and opportunity, if there are a selection of high quality assets to own, I'd concentrate on the ones that is inflation-resistant, all other factors being equal.  Inflation resistant businesses are probably inherently 'better' businesses - requires less capital and have a brand value that enjoys tremendous earning power that can ride out poor economic environments.

 

Revisiting some of Buffett's letters in the late 1970s and early 1980's (some of his earliest) he focused tremendously on inflation.   

 

Interestingly he also gave an extensive example of how important the goodwill of a business is, and how businesses with a lot of goodwill benefits more during a time of great inflation. 

 

I don't know when inflation will happen or if at all.  But if it is one more 'factor of safety' that helps better the odds, I'll take it.

 

 

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I would go with Services and People based firms.

There are many IT consulting firms which are publicly traded (CTSH comes to mind which is undervalued currently in my opinion for their growth). Of course marketing/advertising/research firms are other candidates.

 

About capital heavy firms, don't discount them completely, one would need to look through to their pricing power. In the short to medium term, capex might not significantly affect some of these firms especially if their assets are long lived. Combined with that if they are able to increase their prices, that could be a significant inflation hedge. Take a look at some of BAM's assets, they have inflation protections in built into their contracts. Yes they are capital heavy, but their Assets are very long dated and don't require replacing all that often.

 

Insurance companies: They are getting killed right now because their reinvestment rates are the lowest in a generation. High inflation implies higher interest rates and reinvestment returns improve.

 

Asset Managers: Have fee based income. Are "people" firms. They are not totally an inflation hedge, but I can see them continuing their margins and cash flow.

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