Hi Everyone,
When you read about inflation and investments, you usually hear questions like, "Should I switch to commodities?" or "Which stocks benefit the most from inflation?" or "Which stocks are the least affected by inflation?" and so on.
But I want to give you a different point of view today. One that you probably haven't heard much about. One that has nothing to do with stocks.
Inflation hurts poor people more than it hurts rich people. You can stop buying expensive things pretty quickly, but you still have to pay for the things you need to live. When the price of everyday items goes up, it's a bigger deal for someone who makes $30,000 a year than for someone who makes $300,000 a year.
This leads to different spending habits that are a disadvantage to people with lower incomes. At first glance, $1000 for shoes seems like a lot of money until you compare their quality and durability to that of cheap shoes. Most of the time, you can get high-quality cordovan leather shoes with good stitching for $1000. If you take good care of these shoes, they should last between 10 and 20 years, in some cases even longer. Now, let's compare how long $100 shoes last. For that price, the work isn't as good, so the shoes wear out quickly and need to be replaced often. If you buy cheap, you buy twice.
There’s an economic theory that describes how poverty causes greater expenses to the poor than to those who are richer: The Boots Theory.
The Boots Theory comes from a passage from the 1993 novel Men at Arms, by Terry Pratchett. He writes:
“The reason that the rich were so rich, was because they managed to spend less money. Take boots, for example. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while a poor man who could only afford cheap boots would have spent a hundred dollars on boots at the same time and would still have wet feet.”
Also, you have to think about how the guy who buys new boots every year is affected twice: on the one hand, he wastes money on cheap quality every year, and on the other, the price of the boots goes up over time.
The poor guy is used to buying cheap boots because he thinks that the expensive ones will cost him too much money. In reality, the opposite is the case and he would save much more if he saved some money up and changed his spending habit. Quality is cheaper.
By spending what seems like more at first on real quality, he protects his money from inflation by making a one-time purchase that will last for years and save him money in the long run. So, the first thing to do to fight inflation is to buy quality goods (similar to stocks).
The next two lessons, "Buy soon" and "Buy in bulk”, go together. Getting something sooner rather than later is a good idea for anything you would buy anyway. You need hiking boots for a trip next year? Buy them this year because they might cost more next year. You still need new kitchen tools? Choose the best ones and buy them as soon as you can.
What could you buy in bulk that you would use anyway? Toilet paper, razor blades, and cleaning tools for example. Yes, it sounds strange to buy toilet paper for $1000 and store it, but it's the easiest way to protect your money from inflation (unless you want to spend $1100 after the next price increase). Because there are two things you can be sure of: you will need it, and it won't get cheaper.
In conclusion, protecting your money from inflation requires a thoughtful approach that involves considering several factors. Buying quality products, buying early, and buying in bulk are three key strategies you don’t hear often that you can use to protect your purchasing power from inflation.
And if you have still money left after you have stuffed your house with toilet paper you can invest it in appreciating assets like stocks. 🙂
Until the next issue (which will be about stocks again). 👋
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.
Nice piece. Buying in bulk and buying early is clearly the right response to inflation. Buying quality is right in principle, but requires care in practice. I just reluctantly replaced my 30 year old Merrill hiking boots that I traveled all over the world in. They were cheap but served their purpose for a long time. Last winter, my sister sent me a photo of her shoveling snow in Buffalo wearing the same cheap, old, brown, one piece snowsuit that our parents bought for her in the 1970s from Kmart. The snowsuit is an aesthetic horror but it serves its purpose well enough. Her husband still rides the same heavy, steel Schwinn road bike that he rode in high school 40 years ago. My brother’s kids still use same cheap indestructible snow sleds we used as kids. And so on. Sometimes things are cheap not because they won’t last (and of course cheap things often don’t last), but because they are unfashionable (bought by the poor). But if you’re ok with being unfashionable, cheap things can sometimes work.