Ongoing Inflation...

In my last blog post, I concluded that actors in the economic environment will take time to adjust their own demand and supply at their current settings. Since 24 February 2022, one new variable rendered my conclusion invalid for next few months or two years from that date. The Russian's 2nd invasion in Ukraine made the prices of many key materials higher than before due to the downward change in the supply.

Finally, the prices in the stock markets, on the global level, are adjusting downwards. It is very good news for any rational investors. However higher inflation rate and depressing stock prices may spell hardship for many of us, including myself in the short run.

Inflation rate is the difference between price of current period and price of previous period. With regards to what Warren Buffett described the inflation, we can look at the company's pricing power.

Apparently, I found out that Hermann Simon wrote few books about pricing. Because of that, I learnt that he is avid pricing consultant. I originally knew him first due to his 'Hidden Champions' book. 'Hidden Champions' book allows me to understand better how competent companies can conduct its business with what.

With his generous writing about pricing, I was totally surprised that so many people still choose the wrong pricing choice, all other things equal. Just like capital allocation, pricing strategy is very complicated itself becaue we do not know what the actual response from the customers will be like. It seems to be clear that if the product/service you offer is so unique that no one is willing to consider the alternative or substitute, the supplier will have very significant pricing power.

Having all these written, Warren Buffett correctly sum up below:

If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business

In the past, Netflix was offering very good product to everyone globally. I first noticed Netflix when I was airbnb-ing in USA in 2014. Netflix slowly increased price abit over years and it didn't lose a lot of subscribers. That is one hell pricing power. But now, Netflix is facing a problem because of new competitors and ever-rising (content) costs. Apparently, due to the natural law of competition, the pricing power can only last as long as it can. This certainly remind me of what Toto Wolff said about complacency (in the Netflix show called 'Formula 1: Drive to Survive'). Now, it seems that Mercedes-Benz is struggling in the current Formula 1 due to new regulation. It is one point we should take note of although it is difficult to know when each successful company is at the inflection point.

No debt gives a lot of financial safety to any companies. But, with limited capital, any company will not be able to expand faster or tide over unexpected short term freeze that was caused by account receivables collection. However, no debt can induce complacency. It is also reasonable to say that some debt can keep anyone on toes. At this point, we have to question how much right amount of debt a company should have in order to remain competitive. Perhaps less than 40% gearing ratio? More than 50% gearing ratio will be fine in a stable environment (under assumption that cash flow is not frozen) but will bring you big problem in an abnormal environment like now. It is one of these inflection points some company will have. At this point, I will end here because I feel that I should observe more about FANUC before I can draw more conclusion in connection to debt.

Disclosure: No position in FANUC