Warren Buffett is widely regarded as the greatest investor of our time, and for good reason. He’s been investing for 80 years. He bought his first stock at age 11, and his holding company Berkshire Hathaway (BRK.A -0.01%) has generated an average annual return of over 20% for shareholders dating back to 1965.
BRK.A Total Return Level data by YCharts.
So, it’s no surprise that investors look to Buffett’s investing activity for insights into the state of the market. In recent years, Buffett has been fairly stingy, but that changed in 2022. According to the company’s mid-May 13F filing, Berkshire Hathaway spent over $50 billion buying up stocks as prices came down significantly. And with $100 billion in cash and short-term Treasury bills on Berkshire’s balance sheet, I’d be willing to bet we’ll see a whole lot more buying when the company releases its second-quarter 13F filing in mid-August.
Image source: Getty Images.
I believe now is an excellent time to be buying stocks. Let’s unpack Buffett’s recent buying activity to understand why.
Stocks look very cheap
A part of Buffett’s investing strategy focuses on buying stocks below their intrinsic value, and with the recent decline, there are plenty of cheap stocks out there right now.
Consider Berkshire Hathaway’s recent $1 billion investment in Celanese Corporation (CE 1.24%). Celanese is a massive chemicals producer for industries ranging from pharmaceuticals to electric vehicles (and nearly everything in between). While it’s impossible to know Berkshire Hathaway’s exact reasoning for buying up over 7 million shares of this company, it likely had to do with the valuation.
At current prices, the stock trades for a price-to-earnings (P/E) ratio of 6, which is the lowest it’s been since 2009.
For comparison, the company’s largest competitor, DuPont de Nemours (NYSE: DD), trades at a PE ratio of 19.
Like Buffett, investors should take advantage of the recent decline in stocks to buy up quality assets at cheap prices.
There’s both safety and upside in strong brands
Warren Buffett has long praised businesses with loyal customer bases. The strength of a company’s brand is one of the most effective moats.
This is likely why Berkshire Hathaway added to its position of Apple (AAPL -0.67%) stock, which now represents over 40% of its total equities portfolio.
According to a recent survey by PCMag, 92% of iPhone users plan to stick with the brand when they upgrade their phones. By contrast, the two biggest competitors to the iPhone — Samsung Galaxy and Google Pixel – polled future retention rates of just 74% and 65%, respectively.
Apple’s brand loyalty is further observed by its net promoter score (NPS) of 73, which is among the highest in the consumer electronics industry.
A net promoter score is a metric that’s produced by surveying customers to determine how likely they are to recommend a product to friends and family. Word-of-mouth marketing is one of the most effective methods of building brand loyalty, so this metric carries a lot of weight.
Image source: Getty Images.
Time arbitrage is your greatest advantage
Buffett understands that the market is painfully short-term focused. This is largely due to the compensations structure of institutional investors, but it’s also a reflection of human emotions.
By simply extending your time horizon beyond that of the market’s, you give yourself a tremendous advantage.
It’s certainly possible that stocks could continue to fall from current prices, but it’s very likely they will recover and move higher given enough time. In fact, the market has never failed to reclaim an all-time high, so history is on your side.
By focusing on buying stocks that trade below their intrinsic value as well as those with strong brand loyalty, you can emulate the Oracle of Omaha and emerge from this bear market as a winner.