Every year, Warren Buffett writes an annual letter to shareholders of Berkshire Hathaway. This letter typically holds some commentary and reflection by Buffett, and it accompanies the report being provided by the team at Berkshire Hathaway. Usually, the letter is full of gems and wisdom. This year was no different.
In my first read, several things jumped out to me. Each concept is simple enough to understand yet important enough to be singled out. That’s what I will do over the next 2-3 posts.
This is my 2nd lesson that I believe is valuable for readers and investors to take to heart. If you’d like to read Part 1 again, you can click on this link.
For Wealth, Forget Cash
Over the last decade, savers were punished with low interest rates. I can still remember the days when a High Yield Savings Account felt like the mother of all ironies. Now that we’ve seen rates increase, it feels like hoarding cash is a win.
Buffett disagrees. Here’s what he writes-
“Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change…Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.”
Cash is great for many things–
An emergency fund
An upcoming purchase or expense (i.e. vacation, wedding, tuition payments)
Your sleep number (what you need to see in the bank so you can sleep at night)
Cash is not great for building your balance sheet. Why is that?
Inflation Destroys Purchasing Power
We must never forget that we are in a constant war with inflation. Fortunately, the rate of inflation continues to cool. This is a great thing.
Per the USDA's Economic Research Service, the average price of milk in 2020 was $3.32. Today's average is $3.98.
That’s a 19.9% increase over 4 years (we’re still early in 2025). If we annualize that number, it’s almost 5% per year. Some may argue that prices are going to fall. Perhaps they will.
I believe that we aren’t likely to see significant deflation (falling prices). Instead, the prices of today are most likely a “new normal.” The battle will be to slow the rate of tomorrow’s price increases. That seems to be happening, though we may not be out of the woods.
The entire point I’m making is that earning 3-4% on cash today does not matter if the cost of basic necessities could potentially average 3-4% also. You’re just treading water. We must be mindful of the long-term impacts of inflation on our purchasing power.
In my view, the best long-term hedge against inflation is equities. Don’t believe me? Good. Here’s what Warren has to say:
Paper money can see its value evaporate if fiscal folly prevails. In some countries, this reckless practice has become habitual, and, in our country’s short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency.
Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country’s citizenry. So, too, with personal skills. Lacking such assets as athletic excellence, a wonderful voice, medical or legal skills or, for that matter, any special talents, I have had to rely on equities throughout my life. In effect, I have depended on the success of American businesses and I will continue to do so.
These last 2 paragraphs should be a central doctrine for us investors. We use our currency to live and our savings to provide us a buffer against the unexpected. I've never met anyone who didn't desire to provide economic security for themselves and loved ones. To do that, we have to protect our long-term purchasing power.
Yes, equity markets can be volatile and scary at times. This is why we need to have a strategic plan for our capital–both now and for the future. I believe that your planning today is the key that allows you to take a long-term focus with your portfolio. Don't forget that.
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