Buffett didn't use CPI, and neither should you. In the 10 years subsequent to the 1974 crash, Buffett estimated inflation based on claims at Berkshire's insurance subsidiaries at around 1% per month. Given the stimulus following the 2000 crash, I would bet 13% per year isn't far-fetched.
This leads to some jarring figures. Your $1 of 10 years ago has about $0.25 worth of purchasing power today. If I live to be 100, in 2087 I will need over $4000 to generate $1 of today's purchasing power. Of course, I do think there are periods when it is slower - it tends increase the fastest when deficits are running high and national debt is increasing. Real estate or farmland prices might be a better indicator than commodities over the long term.
So my current point of view is one needs to earn 13% a year after tax just to keep pace with inflation. If I have any clever ideas I will let you know, but what I have been increasingly trying to do since last July is buy companies that (1) are selling at good prices (2) can be reasonably expected to increase in intrinsic value for a decade or more, then hold them regardless of the market price. This approach has a few interesting implications on a personal level. First, I spend significantly less of my time evaluating investment opportunities than in former years, because only a tiny handful of companies come close to meeting them. Second, because when I take a position I don't intend to sell it for 5-10 years at least (fingers crossed), I am chronically short of cash. I can understand the value now of having insurance or other cash flow generating subsidiaries, but that is a problem I will have to solve on a smaller scale. A structure of this type provides natural dollar cost averaging, with assets deployed into whatever is most attractively priced in the market. This is a much happier way to live than the kind of rabid position rebalancing investors have to deal with in hermetic portfolios. |
