- Wealth PMS (50L+)
A question asked at the Warren Buffett Annual Conference (Humblebrag: I was there) 2022 was: How do I invest in a way that beats inflation?
Buffet’s answer: Be exceptionally good at something.
This is actually very deep, and something I’ve believed for a long time. You will make a lot of your initial money – money that is required to beat inflation because you depend on it for building a retirement corpus – by your work alone. I wrote about this in my book, Moneywise:
The most commonly asked question is: What do I invest in that will make money? This is often the wrong question. Because the answer is: Work and get paid.
This is not me making a silly joke. The first crore you make will largely come from your income, from the work you do. Your profession will pay you a salary, or your business will generate the cash, or you’ll join a start-up, which is acquired and, voila, you have some money.
It makes sense then to do something so well that you get paid more and more for it. Today those avenues are more than any other time: you can get courses to make yourself qualified, entirely online. You can get more degrees many years after your twenties. You can chase what you really want to do, and get better at it to the point where you’ll get paid more and more for it every year, which defies inflation.
This is great for a person that wants to work till she dies. You move from “Work more, earn more” to “Work the same, get paid more” in this model. Still needs you to work, though.
But what if you can’t or want to plan for not being able to? You need an income source that will continue and rise. Expertise at “doing” things is super-valuable, and if you’ve done enough, you can get a stream of income from consulting (still needs you to work). The problem is the phrase: Still needs you to work. If you’re trying to beat inflation and love what you do, you might just want to keep doing it and earning more and more because people value the expertise you bring to the picture.
This isn’t always possible. For instance, a person that fixed a car tyre puncture will not get valued more for it now compared to 10 years ago. (Exception: tubeless tyre fixes cost about 2x more, but that’s a tech upgrade) Your skills need to be great at something that people will pay more for, which increases with inflation. So now we have a problem: what if it’s something you really like, but it’s not something you can get people to pay you for?
Or you could go vertically. You could make videos of your experiences, providing learnings and tips, and build yourself a social media following that might be monetized with ads or subscriptions. There are people that do this very well. For example, is Microsoft Excel a skill? Is dancing to rap music a skill? But there’s a Miss Excel who has built an incredible social media following and earned over $1 million, by just mixing Excel lessons with her dancing to rap. (She writes about it)
Not everyone will succeed massively, but the point is this – there is now opportunity to make money if you get really really good at something. In fact, if you pursue the one thing you want to do and do it well, there will be enough people that will want you to. It’s unfortunate that in India, some incredibly good talent gets paid a pittance, but that’s because we have not yet figured out how to marry talent with opportunity just yet. It’s happening, even if it is a little slow. I’m personally an example: I love finance, and learnt it all on my own. Capitalmind started as a blog and now we are a successful SEBI registered portfolio manager. I don’t know if I’m anywhere close to “exceptionally” good, but I totally love what I do, and learn something new everyday. As long as you’re learning and loving it, you’re in the game, and there’s a reward that will come, eventually.
What people wanted to hear, of course, wasn’t that. It was, oh you can buy this kind of stock and stay invested forever. Is that even possible?
What makes sense to most people in the financial world is to build a portfolio that is so huge, it will take care of inflation and everything else and still generate income. This is relatively a lot more difficult than upskilling yourself and doing great things, because those are in your control. And more importantly, that to beat inflation, upskilling yourself is a better idea than to build a portfolio. Because portfolios take a lot of time to develop to a reasonable size, but inflation is today and now.
However, to those not currently employable, or the physically challenged, it is an enormous barrier to upskill.
If you can’t do it, or are in a situation where you really don’t love what you do, your better bet is to build assets that will generate passive income that might beat inflation. The typical thought process is:
This is altogether more dependent on luck than on skill, as you hardly have any control over what happens. Your stocks may underperform. A complication in real estate could easily result in your asset earning sub-inflation returns. As you increase the distance between yourself and your money (investing in other people, or a market-related activity) you increase the risk that you can’t meet inflation.
Some of you – and I hope, many of you – will have way more money than you might ever require for expenses. I’ve met far too many people who are incredibly happy in their lifestyles, spending Rs. 100,000 to 200,000 per month. Even if you consider 6% inflation, Rs. 3.6 cr. is enough to carry a Rs. 100,000 per month expense forward, if your corpus earns about 7% a year in returns.
Many such people have assets way higher than that. And if you do, you shouldn’t really care about inflation as much as just deploying your money in the right way: spread them across asset classes (or hey, build your own business with the extra cash). Inflation matters when you need to spend the money – and if you have more than you’ll ever spend, then the money doesn’t really need to beat inflation. It just feels good to do so.
Those people do not need passive income. They might desire growth and capital appreciation. They can take risks if they want to. And choose not to. (Real wealth is when you can decide you don’t want to be in the rat race of careers or inflation-adjusted returns anymore)
Whatever the case, for such people, upskilling is not useful as a construct. They can just pour money into different and interesting things, or just buy a passive index fund and leave it alone.
While it would entirely be in our benefit, being a portfolio manager, to tell you that the best way to beat inflation is to invest in stocks, it would not be true. The best way for you, at the early level, to think about how you can generate income that beats inflation is, and I paraphrase Buffett again: Be exceptionally good at something.