TIMING INVESTMENTS DURING HIGH INFLATION

There is hardly a question that comes up more frequently: When to make stock investments during times of high inflation.

CEOs and CFOs struggle with the same question when considering acquisitions of companies or divestments.

I developed a concept that might help you think through these important questions. It is called the MAXIMUM POINT OF PAIN (MPP) AND MAXIMUM POINT OF GAIN (MPG) during a period of inflation.

Every industry reacts different to high inflation.

Some industries get hit right away when inflation rates go. Therefore, valuation of companies in these industries get hit early on. However, many industries react with a significant time lag to rising inflation.

An example for a significant delay in reaction to higher inflation rates is the insurance industry, at least during the 1970s inflation period. It took several years after the onset of higher inflation for insurance companies to reach their MAXIMUM POINT OF PAIN. Investors to bought insurance companies too early, were hit in many cases.

The reason is simple: It can take 1-3 years until higher inflation impacts revenue and cost positions of a company.

The insurance industry is actually a very tricky case. Initially, insurance companies may seem to fare well with higher inflation. Some companies may even succeed to increase premium income. However, this advantage of higher revenues may turn out to become a major headache later when insurance policies produce much higher claims costs than anticipated.

LOOK AT WARREN BUFFETT DURING THE 1970S

It seems that Warren Buffett had admired GEICO Insurance's business model for a long time. However, he waited a long time to make a substantial investment into the company as the following chart illustrates (simplified illustration based on internet research):

Buffett managed to wait with his investment until high inflation created with some delay a major "tsunami" in the insurance industry. Doing so helped him to achieve an exceptionally attractive purchase price.

In my view, Buffett was aware of the delayed Maximum Point of Pain that seems to be typical for insurance companies. This was probably the reason that he waited until 1976 (the inflation shock happened 1973/4; in 1976 inflation came down already) with his big investment into GEICO.

LESSON LEARNED

Understanding the Maximum Point of Pain (and MAXIMUM POINT OF GAIN) of an industry is an important input parameter for timing investment decisions. The MPP and the MPG are greatly dependent on the respective industry.

Good luck turning inflation risks into opportunities and have a great week

Please, contact me if your company is interested in inflation management workshops or management consulting ([email protected]).

Be legendary,

Wolf

(Dr. Wolfgang Hammes)

If you are interested in our help, here are the services we provide (examples):

1. Management workshops on strategic inflation management?with tons of examples and applications
2. INFLATION STRATEGY STRESS-TESTING?for management boards
3. Management training on INFLATION MECHANICS: How does inflation work? How does it impact our strategy? What is next?
4. Consulting services
5. Sparring partner to top management?(on retainer arrangements - limited availability)
6. Keynote / Impulse presentation in board meetings

How to reach me:

email: [email protected]

phone: +1 561 537 1819 (The Vangi Group LLC, the consulting company I co-founded)

As always, the newsletter is for informational purposes only. It is written to invite critical discussion of my current views, opinions, and interpretations. It is not advice in any form

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