A Rule #1 Investor’s Framework for Staying Calm When the Dollar Feels… Less Solid
Inflation is one of those problems that doesn’t always look dramatic in the moment—until you zoom out. It’s not usually a sudden “lights out” event. It’s more like a slow leak in your financial tires: you can keep driving for a while, but you’re losing performance the whole time… and eventually something gives.
For everyday investors, inflation quietly raises a critical question:
If the dollar buys less over time, how do you invest during inflation in a way that protects your purchasing power—without turning investing into a guessing game about the economy?
That’s what this article is about.
Because when you invest the Rule #1 way, you’re not trying to predict the next headline. You’re focused on buying wonderful businesses—companies with durable moats and real cash flows—at prices that give you a margin of safety. Inflation matters, but only to the extent that it changes the business itself.
Let’s break it down.
Inflation Is the Silent Tax That Doesn’t Ask Permission
Inflation is the general rise of prices over time. But the reason investors care isn’t simply that “prices go up.” It’s what that implies:
Cash buys less next year than it buys today
Savings lose purchasing power if returns don’t keep up
Future expenses—retirement, tuition, healthcare—become more expensive
That’s the obvious part.
The less obvious part is that inflation isn’t just a cost-of-living issue. It’s also a valuation issue. When inflation rises, it can affect:
Input costs for businesses (labor, materials, transportation)
Consumer behavior (pulling back, trading down, reprioritizing)
Interest rates
Discount rates, which influence what investors are willing to pay for future cash flows
Inflation isn’t automatically “bad.” It’s a regime change that separates businesses with real pricing power from businesses that get squeezed.
How Inflation Affects Businesses (And Why Moats Matter More Than Ever)
Rule #1 investors don’t start with inflation charts. We start with the business.
When inflation shows up, every company faces the same basic test:
Can you raise prices without losing customers?
If the answer is yes, you’re looking at pricing power—often a sign of a durable moat. If the answer is no, inflation can quietly destroy margins.
Consider two broad categories:
Commodity-like businesses (no differentiation):
Customers buy the cheapest option. Rising costs can’t be passed on. Margins get compressed.
Moat-driven businesses (differentiated or deeply embedded):
Customers stick around even when prices rise. Inflation gets passed through instead of absorbed.
This is why inflation doesn’t automatically tell you what to buy or sell. It tells you to pay closer attention to business quality, especially pricing power and unit economics.
In inflationary environments, Rule #1 investing actually gets simpler: average businesses at “fair prices” become much riskier places to hide.
The Second-Order Problem — Debt and the Interest Rate Squeeze
Inflation rarely acts alone. It often brings higher interest rates along with it.
You don’t need to debate macro theory to see the real-world impact:
Higher rates raise borrowing costs
Debt becomes more expensive to service
Weak balance sheets get exposed
Valuation multiples tend to compress
When rates are low, investors are often willing to pay more for distant future growth. When rates rise, the market becomes less forgiving. Cash today is valued more highly. Leverage matters more.
That brings us right back to Rule #1 fundamentals.
How Rising Rates Show Up Inside a Rule #1 Valuation
Rule #1 is not macro investing—but macro isn’t irrelevant either, because it changes assumptions inside intrinsic value calculations.
Here’s where inflation and rates become practical:
Discount Rates and Valuation Multiples
Higher rates generally reduce what investors are willing to pay for future cash flows. This is why high-multiple stocks often struggle in rising-rate environments.
Debt Costs and Owner Earnings
Companies reliant on variable-rate or short-term debt can see owner earnings shrink as borrowing costs rise.
Demand Sensitivity
Inflation and higher rates can pressure consumers. Some businesses are resilient. Others are cyclical. The difference shows up in fundamentals.
A “macro environment” only matters once it shows up inside the business.
How to Invest During Inflation Using the Rule #1 Framework
Instead of reacting to inflation headlines or trying to predict central bank decisions, Rule #1 investors translate macro conditions into better business questions:
Does the company have pricing power?
Look for evidence, not narratives: stable margins, loyal customers, brands people choose even when prices rise.
Is the balance sheet strong?
Inflation and higher rates punish fragile debt structures. A great business with bad leverage can still be a bad investment.
Are owner earnings durable?
Separate short-term noise from long-term structural damage
Is there a margin of safety in the stock price? When uncertainty rises, Mr. Market gets emotional. Margin of safety isn’t about bravery—it’s about preparation.
What Is the Best Hedge Against Inflation?
Investors often ask for “the” inflation hedge—gold, real estate, commodities, or something else.
From a Rule #1 perspective, the best hedge against inflation is owning wonderful businesses with durable moats and real pricing power.
Businesses that can raise prices without losing customers are often able to:
Protect owner earnings
Maintain margins
Adapt through changing economic conditions
That doesn’t mean every stock is an inflation hedge. Quality, valuation, and margin of safety still matter. But over time, businesses with strong moats have historically been better positioned to ride inflation than cash or speculation.
The Takeaway — Inflation Is the Backdrop, Not the Boss
Inflation and rising rates can feel like they’re in control. But as a Rule #1 investor, your job is to control what you can control:
the quality of the business
the price you pay
your margin of safety
your behavior when Mr. Market panics
Do that, and inflation becomes less of a threat—and more of a filter that highlights which businesses are built to endure.
