Warren Buffett's Inflation Plan: Buy, Buy, Buy

Rapidly rising prices are on the radar for virtually everyone in America – even the billionaire class. Indeed, Warren Buffett himself has his eyes on inflation.

Buffett finally whipped out Berkshire Hathaway's (BRK.B, $318.99) checkbook in a big way earlier this year, spending tens of billions of dollars in a matter of weeks.

All it took was a historically bad start to the year for stocks – or at least, that's how things would appear at first glance.

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But stumbling share prices, while certainly critical, aren't the whole story here. Warren Buffett clearly has been monitoring America's rampant inflation, which appears to be a key factor driving his renewed appetite for equities.

And make no mistake: Berkshire's chairman and CEO is hungry.

Berkshire Buys Like There's No Tomorrow

Buffett has embarked on a shopping spree the likes of which we haven't seen since the Great Financial Crisis. During the first quarter …

• The Berkshire Hathaway equity portfolio scooped up $41.5 billion in net stock purchases in the first quarter. That's the most cash Buffett has splurged on equities in a quarter since 2008
• The Oracle of Omaha spent another $3.2 billion buying back BRK.B shares.
• Berkshire also announced that it would spend $11.6 billion to acquire insurer Alleghany outright – a deal that should close during the fourth quarter.

True, the market's terrible start to 2022 no doubt played a starring role in Buffett's largesse. The S&P 500 tumbled as much as 13% from its all-time high at one point in Q1. Buffett, as patient as any investor when it comes to waiting for bargains, at long last pounced – and did so with surgical precision.

Buffett put nearly 30% of Berkshire's massive cash pile to work in equities last quarter. And according to Bespoke Investment Group, almost 80% of his purchases came during the weakest part of the quarter.

That's remarkable timing.

Contrast that with 2021, when the S&P 500 generated a total return (price appreciation plus dividends) of nearly 29%, or its third best run since 1997. Berkshire, however, used the market's outstanding performance as a chance to lighten up on stocks. Indeed, the holding company was a net seller of equities in all four quarters of 2021.

Suffice to say that Warren Buffett is pretty adept at the whole "buy low, sell high" thing. When investors are fearful, he more often than not gets greedy.

Warren Buffett Makes the Most of Inflation

But there's a second (and perhaps more urgent) factor driving Buffett's lavish spending on stocks right now: Inflation.

"It swindles almost everybody,” Buffett told the Berkshire faithful at the company's annual meeting in Omaha this year.

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Remember, Warren Buffett rather famously didn't go shopping when the market lost a third of its value in the pandemic crash of 2020. So while he hasn't been this active buying stocks in ages – it's not just because stocks are in a slump.

It's because of inflation.

When prices are rising at the fastest pace in four decades, cash is trash. That helps explain Buffett's biggest Q1 binge, says David Kass, a professor of finance at the University of Maryland's Robert H. Smith School of Business and noted Buffett expert.

Berkshire raised its stake in Chevron (CVX, $162.49) to $26 billion, up from a modest $4.5 billion at the beginning of the year. That's a big deal. The integrated energy major and Dow Jones Industrial Average stock is now Berkshire's fourth-largest holding.

And it's not like Buffett scooped up those CVX shares when they were on sale. The stock traded at all-time highs in Q1.

In addition to a number of other attractive attributes, Warren Buffett also sees an inflation hedge in Chevron, Kass says. And even if oil prices level off or reverse trend, a stake in CVX is better than sitting in cash and equivalents.

"Chevron has a large stock buyback program and pays a cash dividend of 3.5%," Kass says. "That makes it a relatively safe cash alternative. Instead of earning essentially zero on Treasury bills, why not earn a dividend yield and a buyback yield that combined probably come in somewhere in the high single digits?"

The same calculus of falling stock prices plus rising inflation can be seen in a number of Buffett's recent buys.

Earlier this year, Berkshire disclosed a series of purchases in Occidental Petroleum (OXY, $59.24). Buffett's conglomerate is now the integrated oil and gas firm's largest investor, with 14.6% of its shares outstanding.

"Chevron and Occidental, to me, they make a whole lot of sense," Kass says. "Oil, I believe, is a good hedge against inflation."

This stocks-down-inflation-up dynamic helps explain the sudden and stark reversal in Berkshire's balance sheet.

When inflation is all but dormant, as it was for more than a decade until last year, Warren Buffett was content to accumulate cash. From 2016 to 2021 – a period in which Buffett bemoaned the fact that relentlessly rising asset prices made it nigh impossible to find whale-sized acquisitions – Berkshire's cash hoard essentially doubled, from $75 billion to about $147 billion.

Watching the cash pile up, however, was preferable to destroying capital by overpaying for assets in an aging bull market.

But now, with share prices falling and consumer prices rising, putting cash to work in more attractively priced companies that pay dividends and buy back their own stock is almost irresistible.

For example, Buffett bought $600 million additional shares in Apple (AAPL, $159.48) following a three-session decline in the stock in Q1. The iPhone maker recently authorized a $90 billion share repurchase program and disburses more than $14 billion in dividends annually.

Or take the case of HP (HPQ, $37.9). Hefty buybacks and dividends – not to mention a cheap valuation – no doubt factored into Buffett's purchase of a major stake in the computer and printer maker in April, Kass notes.

Topping off Buffett's buying was an $11.6 billion outlay to outright acquire insurer Alleghany. This Warren Buffett move wasn't tied to inflation – it just seemed a fruitful way to put more of that cash to work. Kunal Sawhney, CEO of independent equity research firm Kalkine, says Alleghany makes a perfect strategic fit with Berkshire's extant insurance businesses.

Even after Buffett's Q1 buying extravaganza, Berkshire retains $106 billion in its arsenal of financial firepower. If stocks keep struggling amid intense inflationary pressures, expect Buffett to make even more bold bets and splashy buys.