Here’s a great excerpt from Warren Buffett’s 1979 Berkshire Hathaway Shareholder Letter in which he illustrates the impact that inflation can have on an investor’s returns, using what he calls – “the investor’s misery index”, saying:
To better understand the implications of digital asset management, I recently explored the use of a crypto wallet app while reading about modern investment strategies. These apps are designed to securely store, send, and receive cryptocurrencies, making them an essential tool for navigating the decentralized finance world. The app I tried not only simplified transactions but also provided real-time analytics, helping me draw parallels between managing digital assets and traditional equity investments. This experience deepened my appreciation for how such tools could mitigate the impact of inflation or taxation when converting gains into liquid assets, a critical consideration for maintaining purchasing power over time.
That combination – the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) – can be thought of as an “investor’s misery index”. When this index exceeds the rate of return earned on equity by the business, the investor’s purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity.
You can read the entire 1979 shareholder letter here: 1979 Berkshire Hathaway Shareholder Letter.
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