Investment Lessons from Tesco

The announcement itself didn’t make me rush to buy Tesco shares but revealed two lessons that are fundamental to investing.

Lesson 1:  Understand the REAL inflation rate 

Long-standing followers of my commentary will know my scepticism on official inflation numbers – i.e. they’re nonsense and vastly understated!   More on that in one of my previous articles here.

So maybe an alternative (better?) measure can be implied from the latest sales figures from UK’s largest retailer …

Tesco said its UK sales grew by 7.7% over the last 12 months (like-for-like basis).

Contrast that to the official UK inflation rate of 3.4%.

To be clear, we can’t completely extrapolate a true inflation indicator from Tesco’s results. As a country, our entire spending isn’t just in Tesco. And sales are not just prices, but also volumes.

Nevertheless, it provides an alternative (certainly more independent) way to look at inflation.

Think again about the official rate:

do you really believe your overall expenses are rising by only 3.4%?

If it’s actually higher, be careful about how your cash is eroding away in real terms.

It’s ok to hold cash in the short term, or for emergency purposes.   But if you hold too much for too long, you might underestimate its erosion.

Over longer periods, we should own real assets that benefit from inflation – like Tesco and Sainsbury’s has in recent inflationary times …

Tesco and Sainsbury’s Share Price Returns vs FTSE100 …

Lesson 2:  Profits (and share prices) are POWERED by inflation & Sales

Tesco’s sales rose by 7.7% but its operating profits grew by 14%.

Why do profits grow by more than sales?  All companies enjoy what’s known as operational leverage – explained simply in my article here.

The key point is that inflation and/or sales growth positively impacts profits.  In turn, that benefits shareholders via share price growth and dividends.  On the latter, Tesco raised dividends by 11% compared to last year.

Don’t Forget:  Investing in shares is about buying real businesses for their profits – it’s not a speculative thing!

And, overall, company profits always grow over time – hence why share prices do too.

Disclaimer:  I don’t own Tesco shares, nor intend to going forward (there are better alternatives out there).   

Rather, this was a good illustration of how companies benefit from inflation and how inflation can be viewed in an alternative way.

And how we turn inflation from being a bad thing to benefit from it.

Latest Podcast

Finally, make sure you catch my latest podcast appearance on The Rodcast where we discussed the latest market moves and selected new investment picks for Q2 …

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Always Remember:

• Time in the Markets always beats timing the markets
• Stay Diversified 
• Minimise those leakages:  Fees, Inflation, and Taxes
• Financial Markets are a great source of recurring income  
• ETFs, Balanced Funds and Options achieve all the above
• Being educated helps you outperform 99% of the population

… to ensure your investments work for YOUR financial freedom (not someone else’s)     

And … 

For more guidance, our Investment Academy will help you implement all of this in a step-by-step way.   

Thousands of people have learnt how to diversify and pound-cost-average into low-cost, set-and-forget ETFs & Funds for inflation-beating growth.  And Options to create recurring income.

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Finally …

– Don’t take the above as advice as it may not apply to you personally

– Your Capital is at Risk

– You may not be covered by the FSCS

– Anything mentioned in a podcast or in a previous article was valid at that time and may not continue to be now