Will Rogers once wrote in his autobiography: “The fellow that can only see a week ahead is always the popular fellow, for he is looking with the crowd. But the one that can see years ahead, he has a telescope but he can’t make anybody else believe that he has it.”
I was recently reviewing old Federal Reserve data from the 1960s that provided data points noting the rising nature of America’s inflationary rate that hit a high of 14% in 1980. While those days are now distant memories for many (and perhaps half of the stock market participants of today have no recollection of them at all), it remains a historical truth of what type of economic environments can face America.
When we discuss investing, it is usually taken as a given that most people want to invest in stocks that have the greatest degree of certainty of growing profits by the highest possible rate over some lengthy time horizon. In that regard, inflation seems like an indirect rather than direct concern in the investment process because the search for great businesses often carries the implicit promise of strength during all economic conditions (including periods of high inflation).
But lately, I’ve come to appreciate the business models of certain credit card companies (Visa and Mastercard), certain banks that charge fees as a net percentage of a given transaction (in particular Bank of New York), and certain real estate brokerage outfits (many of which are no longer publicly traded).
In the case of Visa and Mastercard, it often charges a quarter of one-percent of a transaction’s value (that is why you see some gas stations and grocer-type businesses offer modest cash discounts). Businesses that charge a fee that is a percentage of the total transaction benefit from any inflation automatically. If a $100 transaction becomes a $115 transaction due to inflation, Visa and Mastercard’s fees rise from $0.25 to $0.2875 (exactly proportional to the rate of inflation).
Most of us tend to assume that the economic conditions of the prior months and several years determine what we will encounter over the decades to come. Of course, that’s not the case. Anything that occurred more than twenty years ago may occur, and plus, some risks that have never materialized before may occur in the future. Never a dull moment!
Personally, I think it is best to study every type of adverse economic conditions that have existed at any point in American history, and incorporate that knowledge into the overall construction of a conservative investment portfolio. For a lot of reasons, I always keep coming back to Visa and Mastercard as investments. When I study the history of high inflation at various multi-year moments in the 20th century, these firms are especially attuned to fight this particular type of risk (as well as many others). The valuation with these companies is always a concern, but at the same point, the highs that people lament about Visa and Mastercard tend to become prices that investors a few years hence will wish they could have obtained because these firms continue to grow earnings per share well into the double digits.