Two main ideas to keep in mind about inflation’s impact on money and other assets are:
a) ‘Real’ assets keep getting more expensive. Hence owning real assets is better than owning cash.
b) Cash keeps losing value. Hence cash in hand today is more valuable than cash tomorrow.
The investing lessons flowing from the above are as follows:
1) Real assets including land/real estate appreciate.
2) Fixed interest borrowers gain, lenders lose.
3) Floating interest lenders gain as they can lend at higher interest rates and their own equity earns higher rate.
4) Companies which can raise prices without losing market share or losing volumes gain.
5) Companies requiring high capex lose since cost of materials keeps going up and so does the cost of financing them.
6) Weak companies which are unable to pass on costs are hit badly because their margins shrink and their working capital also goes up for the same volume of sale.
7) Insurance companies are gainers as investment income is their only revenue item and they are able to invest their money at higher rates leading to higher revenues.
8) Bonds and fixed income securities lose.