Inflation is an insidious challenge. Over the years, everything becomes more expensive: housing, clothing, food, transportation, and entertainment. The high inflation rates of recent years seem to have exacerbated this persistent issue.
Much of the frustration about rising prices stems from our memories of better days when the cost of living seemed reasonable. We remember bacon packs at $0.99, cartons of milk at $2, or cans of maple syrup at $5.
These nostalgic memories of idyllic prices affect consumers much like the psychological anchoring bias influences investors. We recall having the chance to buy a stock at $10 years ago, only to see it priced at $100 today. This triggers frustration, disappointment, and, most importantly, a struggle to accept that the new $100 price might still be a bargain.
Hans Rosling, the author of the book Factfulness, wrote that to counter the many biases affecting our reasoning, we should never consider a number in isolation (like $16,800 for groceries or $100 for a stock). Instead, we should view it in terms of ratios or rates—by dividing it by another number.
For example, the price of a stock should be divided by the company’s earnings per share. This price-to-earnings ratio provides far more insight than the standalone price of $100, which means little on its own. The same applies to grocery costs: the $16,800 figure is meaningless in isolation. It needs to be compared to other numbers, such as household income or total family expenses, to gain meaningful context.
I’ve always believed that an investor’s primary goal should be to outperform inflation over the long term. If we fail to beat inflation, our purchasing power will inevitably decline over time. In such a scenario, we might as well spend our money instead of investing it!
In my opinion, stocks are one of the best options to outpace inflation in the long term. This is especially true when investing in companies capable of raising their prices without significantly affecting demand for their products.
Here are two examples:
- Visa: In times of rising prices, Visa benefits as the value of the transactions it processes increases. Since the company’s revenue is calculated as a percentage of the transaction value, its income grows as prices rise.
- Metro: The grocery chain Metro (and its competitors) increases product prices during inflationary periods, boosting its revenues and profits.
Such companies help mitigate the impact of inflation, allowing investors to better cope with the rising costs of groceries and other essentials.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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Philippe Le Blanc’s Blog is published in
P.S.: COTE 100 owns shares of Visa and Metro in its managed portfolios.
