With inflation falling to 2.9%, I’m using the Warren Buffett method to buy shares

Warren Buffett is probably one of the most successful and experienced investors alive today. And in today’s stock market environment, following his guidance can keep investors on the path to long-term wealth creation.

After all, they’ve been through several corrections, crashes, and periods of high inflation before, each time getting richer, amassing $100bn in value in the process.

What’s more, the window of opportunity may now be closed. The Office for Budget Responsibility (OBR) recently made a prediction that the UK economy will recover to pre-pandemic levels by 2024. And inflation is expected to fall from 10.1% to 2.9% by the end of this year.

With that in mind, let’s take a look at Buffett’s strategy for inflation investing to capitalize on the momentum of the apparent recovery.

He loves cash

In small amounts, inflation can help stimulate economic growth. But when inflation is too high, the cost of everything starts to rise. This is reflected in the increase in electricity, gas, food, mortgage bills and other costs for consumers. For businesses, it arises in areas like raw materials, manufacturing, and logistics costs.

As household budgets and profit margins tighten, achieving growth becomes a challenge. And for companies that don’t have a strong cash flow, finding external financing is often necessary. The only problem is that as interest rates rise, borrowing becomes more expensive. And with stock prices rising, raising money through equity isn’t ideal either.

That’s why Buffett always looks for companies that generate a lot of excess cash from operations. Even unprofitable companies that generate positive free cash flow can be financially independent. Additionally, companies with a lot of cash can often steal market share from struggling competitors, which results in superior long-term profits for shareholders.

Inflation vs price power

To reduce the impact of inflation, companies almost always try to pass on increased costs to customers. But not every business has the pricing power to do so. For those who lack brand loyalty, or have low switching costs, price increases are often dictated by what their competitors are doing. And that can make raising prices quite a challenge.

So it’s no surprise that Buffett likes companies that have the power to set their own prices without risking losing custom to competitors. Accidentally Applecompanies with bucketloads of pricing power, it’s the biggest position in Berkshire Hathawayinvestment portfolio.

Take a step back

When it comes to investing, there are no guarantees. Some of the world’s best businesses have slashed their value over the past 12 months. And this downward momentum can continue, even in portfolios using Buffett’s inflation investing strategy.

However, when there are other factors to consider, excess cash flow and pricing power are two traits proven to increase the odds of achieving long-term success. And when combined with smart tricks like diversification and pound cost averaging, investors can take advantage of the new volatility while maintaining risk.