Warren Buffett: The BEST investment during inflation

So, the best investment by far is inflation. It is at its highest level in decades. As a result, inflation has been the number one concern for nearly everyone recently. But what if I told you there was a way for you to never have to worry about inflation ever again? What if there is just one investment you can make, and inflation would never negatively impact you? Sounds too good to be true? Well, don't take my word for it. Instead, listen to what legendary investor Warren Buffett has to say.

As Buffett is approaching 100 years old, let's just say he's lived through his periods of high inflation, maybe a couple of times. I was fortunate enough to attend the 2022 Berkshire Hathaway meeting in person, and something Buffett said about how to invest during inflation really stood out to me. I have been wanting to make a video on it ever since.

Warren Buffett was asked what the single best investment to make during a period of high inflation is. Take a listen to what he had to say, and if you're anything like me, his answer will come as a complete surprise. But first, make sure to like this video and subscribe to the channel if you aren't already, because it is my goal to make you a better investor by studying the world's greatest investors. Now, let's get into the video.

"The best thing you can do is to be exceptionally good at something. If you're the best team, if you're the best doctor in town, if you're the best lawyer in town, if you're the best whatever it may be, you know, no matter whether people are paying you with a zillion dollars or paying good, they're going to give you some of what they produce in exchange for what you deliver. And if you've got it, and if you're the one they pick out to do any particular activity, sing or play baseball, or be their lawyer, whatever it may be, whatever abilities you have can't be taken away from you. They can't actually be inflated away from you. Somebody else will give you some of the wheat they produce, or the cotton, or whatever it may be, and they will trade you for the skill you have. So, the best investment by far is anything that develops yourself and again not taxed, you know, so that's what I would do."

"I got some advice for you too." [Laughter] "When you have your own retirement account, and your friendly advisor suggests you put all the money into Bitcoin, just say no." [Applause] [Music] "Nobody can take away from you the talents you have. I mean, and the truth is that the world will always be willing. They'll need to do something and some people will not have skills, and they will get less of the product of the society than somebody who has other skills. Sometimes that has something to do with education, but a good bit of the time it doesn't have anything to do with education. I mean, it... but to figure out what you'd like to be and figure out how and what you'd like to be is what you're going to likely be good at. You know that the world will always need somebody on that tube to tell us what's going on. So, you know, don't study Becky Quick or something and figure out what makes her good and what you sort of naturally bring to the game."

"I mean, I could have... who's the guy that says you got to spend ten thousand hours doing this or that, and then that... Malcolm Gladwell. You know, I would say just spend ten thousand dollars on something. Well, I could have spent ten thousand hours trying to become a heavyweight boxer, but I don't think I just felt very good at another ten thousand hours. I mean, you stumble in what you really like doing, what you're good at, what's useful to society, and then it doesn't make any difference whether the dollar bill, you know, is not worth in terms of the purchasing power a cent or a half a cent or a hundredth of a cent. If you're the best doctor in town, you know, they'll bring you chickens. I mean, whatever they may do, but you can't take it away from you."

When most people think about how to protect themselves against inflation, they spend the majority of time thinking about what they should invest in. Now, don't get me wrong, that is obviously very important, so important that I actually made an entire video on how Warren Buffett recommends you should invest during inflation. You can check out that video here or watch it after this video. Obviously, it resonated with people because that video has well over 2 million views.

However, focusing only on what investments you should buy during inflation overlooks one very important thing: your biggest wealth-building tool is your income. Let me explain. Let's say someone has an investment portfolio worth a hundred thousand dollars. This is awesome and shows really great progress in this person's wealth-building journey. And let's say that this person is able to generate an annual return of seven percent by investing in a combination of index funds and bonds. This means that each year, they are able to generate seven thousand dollars in investment income. While this is a meaningful amount of money, it's safe to say that seven thousand dollars is just a fraction of what this person makes in a year through their job.

If a hypothetical person makes seventy thousand dollars a year in their day job, that seven thousand dollar investment income is just one-tenth of what they made at their day job. This is what I mean by your biggest wealth-building tool being your income, and probably helps explain why Warren Buffett answered the question the way he did. His answer focused on this concept of protecting your income during inflation.

You have to think of your income in terms of what is referred to by economists as real wage growth. The math behind calculating your so-called real wage growth is actually very simple. You take your percentage increase in your income and you subtract out the inflation rate. So, if you're making five percent more and the inflation rate is two percent, your real wage growth is three percent. However, when inflation is very high, like it is currently, that inflation eats away at the average worker's real wages. So, if you're making five percent more than last year, but inflation is eight percent, your real wage growth is actually negative three percent.

And if your raise was only three percent, your real wage growth is negative five percent. If you didn't even get a raise at all, your real wage growth is a whopping negative eight percent. Looking at it another way, this means that even though you may be making the same amount of dollars as last year, because of inflation, those dollars can now purchase you eight percent less things. Whether that be rent, transportation, food, or things like vacation and going out to eat, this gets to the heart of what we're trying to address in this video.

How can you minimize the impact of inflation on your income? Or thinking in terms of what we just talked about, how can you maximize your real wage growth? According to Buffett, the way you do this is by being excellent at your chosen profession. If you're the most skilled person in your profession in your town, this gives you the power to raise the price you charge customers to keep up with inflation. But this raises one very important question: how do we go about picking what profession we should be in, or what skill we should develop?

Well, fortunately for us, Buffett laid out a framework to help us think through this problem. Picture a Venn diagram with three circles. One circle is what you are good at naturally, another one is what you enjoy doing, and the third one is what is valued by society. In order for you to find a career that is protected from the impacts of inflation, you want to find something that meets all three of these criteria Buffett laid out.

So, let's dive into each of the three criteria a little deeper. The reason it has to be something you're naturally good at is that there are certain things that meet the other two criteria that, for whatever reason, some people just aren't good at. As a result, it would be much better for them to spend their time elsewhere. Buffett talked about how it would have been useless for him to try to be a heavyweight boxer. Buffett is someone of average size and, according to his own words, below average athleticism. No matter how hard he trains, he would never be able to beat someone that is six foot four and 230 pounds of pure muscle.

Instead, he focused his time on something he had a natural talent for: investing. And we all know how that turned out. There is a perfect example of why it is important to choose something you're naturally good at. It also has to be something you enjoy doing because you are going to be spending a lot of time engaged in this activity. Buffett cited well-respected author Malcolm Gladwell's renowned book, "Outliers.” In this book, Gladwell talks about how, in order to master a skill, you need to spend 10,000 hours on it.

It's a lot more bearable spending such a large amount of time on a certain activity when it's something you genuinely enjoy. You want to find something that feels like play to you, but looks like work to other people. And then finally, it has to be something that is valued by society. Valued by society is just a way of saying something that people are willing to pay a lot of money for. Something can meet the other two criteria, but if people aren't willing to pay money for it, you won't be able to make income from it.

For example, you could be naturally talented at the game of chess. You may also really enjoy it and be willing to dedicate 50 hours a week to it. However, unfortunately, in this case, chess isn't a skill that is highly valued by society. It would be really hard for you to make a living doing this full-time unless you're the best 0.0001% in the world at chess. On the other hand, let's say you are also naturally really good at computer science. Maybe you took some introductory classes in the subject at school and noticed you just had a knack for it.

Additionally, you also discovered that you genuinely enjoy it. Now, this is a skill that is highly valued by society. Many people with a background in computer science go on to do software engineering, and software engineers are some of the most highly paid jobs out there. Just a quick aside: many times, the professions that are highly valued by society from a monetary standpoint require a college degree, think lawyer, doctor, investment banker, etc. Things like that. However, there are many professions that don't require a college degree that are still highly valued by society. Plumbers and electricians are two that immediately come to mind. In certain parts of the United States, these jobs can pay well in excess of a hundred thousand dollars a year.

Whether a certain skill or profession is valued by society from a monetary standpoint comes down to the basics of supply and demand. On the demand side, how much demand is there from society for people that have a certain skill set? And on the supply side, how many people are out there that have that skill set? As a general rule, the more that demand exceeds supply, the more those jobs make.

So, there you have it. I hope you guys like this video, and make sure to check out the video I did on how you should be investing during inflation according to Warren Buffett, because I'm sure you'll find that information valuable. It is one of my favorite videos I have made, and if you enjoyed this video, give it a thumbs up because it keeps me motivated to keep making these videos for you guys. Talk to you again soon.