Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio) has a long track record of using bear markets to his advantage, famously saying, “The best chance to deploy capital is when things are going down.” For instance, he capitalized on the 2009 global financial crisis through making shrewd investments in companies such as Goldman Sachs (GS, Financial) and Bank of America (BAC, Financial).
However, Buffett did not follow his own advice in the 2020 stock market crash. In fact, he even sold airline stocks at relatively low prices due to their highly uncertain short-term outlook. They, along with many stocks, have subsequently experienced recoveries from their March lows, though some have not been as spectacular as the S&P 500's overall recovery might suggest.
This may lead some investors to question the Oracle of Omaha’s investing wisdom. They may doubt his ability to capitalize on what is a very fluid and fast-moving stock market, since he has missed out on an opportunity to generate high returns in a relatively short period of time.
In addition, many companies outside of the mega-cap technology sector continue to trade on low valuations after their declines earlier this year. However, Buffett has not shown the same level of desire to take advantage of cheap valuations as he did in the past.
In my view, one possible reason for Buffett’s cautious standpoint during the 2020 bear market may be Berkshire’s insurance operations. He may have been concerned about potential payouts for insurance claims caused by the pandemic crisis.
As Buffett once said, “We never want to count on the kindness of strangers in order to meet tomorrow's obligations. When forced to choose, I will not trade even a night's sleep for the chance of extra profits.”
In other words, Buffett may have been able to identify attractive buying opportunities, but decided against going ahead with them to protect Berkshire’s capital position. After all, the future prospects for the economy are extremely unpredictable.
Furthermore, the prospects for a range of sectors and businesses have been, and still are, exceptionally uncertain. Buffett may have felt that investing in such a period was too risky, since he was unable to ascertain how previously successful business models would adjust to changing consumer demands. In this sense, he seems to have been following his own advice to “Never invest in a business you cannot understand.”
It is too soon to know if Buffett’s caution earlier this year was wise or not, or whether what was wise for Berkshire would extend to the many retail and professional investors who look to him for advice.
Buffett has experienced periods of underperformance in the past. He has also missed opportunities to buy great businesses at what proved to be low prices. However, over the long run, his simple investment strategy has worked extremely well, as evidenced by Berkshire’s 20% compounded returns between 1965 and 2019.
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- Warren Buffett's Tips to Successfully Navigate a Rising Stock Market
- Howard Marks on Dangerous Valuations in a Bull Market
- Benjamin Graham on Investing in a Bull Market
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