“The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently.” — Warren Buffett, 2015
“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.” — Charlie Munger
I. The Consensus
The consensus is clear.
When inflation rises, rotate to value. Sell growth. Buy defensive stocks with low multiples and high dividends. The playbook has been settled for decades.
Everyone knows this.
But what if everyone is wrong? Not wrong about the data. Wrong about the explanation. Wrong about the causation. Wrong about what inflation actually punishes.
II. Fifty Years of the Wrong Debate
The value-versus-growth debate has consumed the investment industry for fifty years.
Academics have written papers. Fund managers have built careers. Index providers have constructed elaborate methodologies to separate stocks into two camps.
And yet no one can agree on what the terms mean.
What is “value”?
Is it a low PE ratio? A high dividend yield? A low price-to-book? A stock that screens below the median on some combination of metrics?
In 1975, value meant General Foods and Consolidated Edison. In 2026, the S&P 500 Value ETF holds Berkshire Hathaway, JPMorgan, and ExxonMobil.
Are these the same thing?
The definitions shift. The index providers — S&P, MSCI, Russell, Morningstar — use different methodologies. A stock can be classified as value by one index and growth by another. The cutoffs are arbitrary. The rebalancing is mechanical. The categories are administrative conveniences, not economic realities.
When someone says “value outperforms during inflation,” which value? Defined by whom? Measured how? The category is not the reality.
III. Consider Visa
Consider Visa.
PE 29. Dividend yield 0.7%. No value screener in the world puts Visa in the value basket. By every standard metric, this is a growth stock.
But ask the question differently.
Visa trades at 29 times earnings. Is it expensive — or structurally undervalued?
Visa grows free cash flow at 12-15% per year. Is this growth purchased with capital — or does it arrive for free?
Visa returns 4% to shareholders annually through buybacks and dividends. Is this a growth company hoarding capital to reinvest — or a cash machine with nowhere to deploy because growth requires no spending?
Here is the answer: Visa does not pay for its growth.
85% of the world’s transactions are still in cash. The digitization wave will carry Visa forward for decades. Visa does not spend a dollar to make that wave appear. It does not build factories. It does not fund R&D laboratories. It does not acquire competitors to maintain share. It simply collects the toll as the wave passes.
So what is Visa? Growth or value? The question is meaningless. Munger saw it clearly: they are joined at the hip. The distinction is artificial. A stock is not growth or value. A stock is a business — and the business either pays for its future or receives it for free.
IV. The Question No One Asks
Here is what the value-versus-growth debate misses entirely.
The question is not: what is the PE ratio?
The question is not: what is the dividend yield?
The question is not: does this stock screen as value or growth?
The question is: what does the B cost?
Every business has an A and a B.
The A is the toll — current earnings, the moat, the short duration. What the business produces today.
The B is the growth — future earnings, the expansion, the long duration. What the business will produce tomorrow.
In some businesses, the B is expensive. Coca-Cola spends $4-5 billion per year on marketing to maintain its brand and grow its reach. BNSF spends billions on rails, locomotives, and maintenance to expand capacity. Exxon spends tens of billions on exploration, drilling, and extraction to replace depleting reserves. The growth is real — but the growth costs capital.
In rare businesses, the B is free. Visa does not pay for digitization — the world digitizes itself. MSCI does not pay for the shift to passive investing — the shift happens without them. Moody’s does not pay for the expansion of global credit markets — the expansion is structural. The growth arrives without effort. The wave is external, permanent, and free.
V. What Inflation Does
Now ask: what does inflation do?
Inflation raises costs. Raw materials cost more. Labor costs more. Energy costs more. Capex costs more. Every input to the business becomes more expensive.
For the business with the expensive B, this is painful.
The factory that cost $500 million now costs $600 million. The marketing campaign that cost $100 million now costs $120 million. The R&D project that cost $50 million now costs $60 million. Every dollar of reinvestment buys less growth. The loop that converts retained earnings into expansion runs hotter — and produces less.
If revenues rise with inflation, the business can compensate. Pricing power matters. But the margin between revenue growth and cost growth narrows. The physics of compounding degrades.
For the business with the free B, inflation is different.
There is no factory to build. There is no raw material to purchase. There is no capex to inflate. The toll — the A — rises with nominal transaction values. Every payment processed is larger. Every dollar of AUM is worth more. Every bond rated carries a higher face value. The revenue rises automatically.
And the B? The wave? The structural growth? It continues. It costs nothing. There is nothing to inflate.
VI. The Rotation Error
The market sees inflation rising and concludes: rotate to value.
It buys Exxon at PE 12 — and Exxon will spend $25 billion per year on capex that inflation makes more expensive, extracting oil from fields that deplete faster than they are replaced.
It buys utilities — and utilities will face rising fuel costs, rising labor costs, rising maintenance costs, all against regulated pricing that lags inflation.
It buys consumer staples — and consumer staples will spend billions defending brands against private label alternatives and shifting consumer preferences, with input costs rising faster than shelf prices.
It sells Visa at PE 29 — because the screener says “growth.”
And Visa’s toll rises with every inflated transaction. And Visa’s growth continues without a dollar of capex. And Visa’s 65% net margin holds because there is no cost of goods sold to inflate.
The rotation is backwards. The market is selling the business that benefits from inflation to buy the business that suffers from it — because of a category error embedded in a spreadsheet.
VII. The Extreme Case
Stagflation is inflation’s extreme case.
In ordinary inflation, the economy grows. Revenues rise with prices. The expensive B is punished, but strong demand can compensate. The pain is manageable.
Stagflation offers no escape.
Costs rise — but revenues stagnate. The economy is flat or contracting. Demand is weak. The expensive B faces a double squeeze: higher inputs, flat outputs. There is no compensation. Margins collapse. The loop that requires fuel runs hotter, produces less, and eventually breaks.
The market remembers the 1970s. It remembers that “value” outperformed. It cites Russell Napier. It builds playbooks around a single historical episode.
But this is pattern-matching from a sample of one. The 1970s are available, so we extrapolate. The graphs exist, so we assume they will repeat. This is the availability bias dressed as historical analysis.
The real lesson of the 1970s is simpler than the consensus admits. Stagflation did not punish “growth.” Stagflation punished the expensive B. The businesses that had to spend to grow — that required capital to expand, that depended on reinvestment to compound — were destroyed. The businesses that could grow without spending survived.
VIII. The Same Question
Whether inflation or stagflation, the question is the same.
Not: value or growth?
Not: low PE or high PE?
Not: what did the 1970s teach us?
But: what does the B cost?
If the B is expensive, inflation punishes. The higher the inflation, the worse the punishment. Stagflation — inflation without growth — is the terminal case.
If the B is free, inflation rewards. The toll rises with nominal values. The wave continues without capex. There is no cost to inflate. There is no squeeze to survive.
IX. Invisible to the Debate
The Freesurfer is invisible to this debate.
It is classified as growth because its PE is high. It is excluded from value screens because its dividend yield is low. When the playbook says “rotate to value,” the Freesurfer is sold.
But the Freesurfer’s B is free.
In inflation, its toll rises. Its margins hold. Its growth continues without spending. It does not fight inflation. It surfs it.
X. What Inflation Really Punishes
The industry has spent fifty years debating value versus growth.
The real question was always elsewhere.
Does the business pay for its future — or does the future arrive for free?
Inflation does not punish growth.
Inflation punishes the expensive B.
It rewards the toll that rises with nominal values. It rewards the wave that carries without capex. It rewards the business whose future costs nothing.
Value versus growth is the wrong question.
The cost of the B is the only question.
And once you see it, you cannot unsee it.
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The Freesurfer doesn’t fight inflation. It surfs it.
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