ASX shares have the potential to offer investors some welcome shelter from the wealth-eroding powers of inflation, a fact that billionaire investor Warren Buffett is well familiar with.
While inflation in Australia has come down from the 7.3% levels of late 2022, the monthly consumer price index (CPI) indicator still stood at an uncomfortable 4.9% for the twelve months to July.
That means you don't want to be stashing cash under your mattress. And most bank deposit rates will also see you losing money.
Which brings us back to Warren Buffett and ASX shares.
As the head honcho of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), Buffett has navigated his investment company through numerous years of high inflation. In 1980, inflation in the US even topped 15%.
Here's how the Oracle of Omaha managed to deliver more than 50 years of outperformance at Berkshire, while amassing a personal fortune of more than US$115 billion, through those inflationary times.
Real-world value
When running my slide rule over ASX shares in these days of high inflation, a few Warren Buffett investing nuggets come to mind.
"The best investments provide real world value, not just market value," is one.
Buffett also said, "The greatest protection against inflation is ownership in a business that goes up in value."
So, how might he target ASX shares that go up in value with inflation still running hot?
First, Buffett tends to avoid companies holding excessive debt.
As we've seen over the past 18 months, high inflation leads to rocketing interest rates. And high interest rates put a heavy burden on companies that may have loaded up on debt when rates were much lower.
That's why Berkshire's portfolio is weighted with stocks that are generating strong free cash flows. This greatly reduces, or even negates, the impact of higher interest rates on their bottom line.
And it's why some of Warren Buffett's biggest holdings include Apple Inc (NASDAQ: AAPL) and Coca-Cola Co (NYSE: KO).
Both companies have free cash flow margins of more than 20%.
ASX shares with big moats
Here's another valuable Warren Buffett adage to keep in mind when researching ASX shares:
In business, I look for economic castles protected by unbreachable moats… We are trying to figure out … why is that castle still standing? And what's going to keep it standing or cause it not to be standing five, 10, 20 years from now.
In inflationary times, companies' costs are going to rise. However, companies with weak pricing powers won't be able to match that increase in costs with equal increases in prices without losing market share to their competitors.
On the other hand, companies with big moats – like Coca-Cola and Apple – should be able to match those cost increases without losing any significant market share.
Until inflation and interest rates begin to substantially decline in Australia, those are two key factors to keep in mind when investing in ASX shares.
