Price inflation is here.
And there’s no denying the price of gold and the value of Bitcoin have soared in recent years. When measured against other currencies, Bitcoin’s ascent has been eye-popping. And, as I write, the price of gold is up by about 500% in the two decades since 2001. Both assets have done well for investors.
But they are not the only asset classes that have risen. Bonds, real estate (property), and stocks have powered higher as well. And those rises have been partly powered by extraordinary measures taken by governments aimed at supporting the economy. For example, ultra-low interest rates and quantitative easing (QE).
Assets could face downwards pressure
But that’s not the whole story. I reckon there’s been a great deal of speculation exaggerating the rise of those assets as well.
However, rising inflation pressures governments to raise base interest rates to keep prices under control. And rising interest rates tend to apply a braking action to economic activity. And to me, that means there could be an elevated risk of assets falling in value ahead. Or perhaps they’ll just find it difficult to make further progress.
And that’s why I’m avoiding gold, Bitcoin, investment property, and other assets that have risen a lot in recent years. However, my assessment could prove to be wrong and those assets may go on to perform well for investors in the years ahead.
Nevertheless, to me, the most attractive class of asset is stocks and shares. And I’m keen on such equities because the businesses behind them are active, rather than passive in the way that gold, Bitcoin, and property are.
In other words, although gold, Bitcoin, and property prices can move up and down, businesses can build value. When an investor holds gold, for example, it does nothing. But when an investor holds the shares of a business, it has the potential to increase value by increasing revenue, earnings, and assets. Although outcomes are not always positive. Sometimes a business can destroy its own value unintentionally, and investors might lose money on the shares.
Investing in uncertain times
But in uncertain times as we have now, I’d rather be holding the active assets of stocks and shares. Each underlying business will likely be adapting and working hard to progress whatever the general economic weather throws at it. And that includes the challenges flowing from inflation.
The great investor Warren Buffett pointed out a while back that businesses can still survive and thrive in an environment of higher inflation. The important qualities they need are pricing power and low capital intensity. If they have those things, they will likely be able to raise their selling prices to preserve profit margins. And they won’t need to keep reinvesting much into big asset bases at a time of rising costs just to maintain their trading abilities.
I think we have several interesting businesses listed on the London market with the qualities Buffett recommends. For example, I’m watching branded fast-moving consumer goods companies Diageo and Unilever among others.