Warren Buffett's value investing strategy came under fire this year for trailing the broader market. He could be about to prove his doubters wrong.
Berkshire Hathaway’s (NYSE:BRK.A) equity portfolio has lost about $64 billion in value since the coronavirus-fueled market crash. The stock price of the Warren Buffett-led conglomerate has fallen by around 21% since the beginning of the year.
During the same period, the S&P 500 index has declined by around 23%.
Among the worst-hit stocks in Buffett’s equity portfolio are airlines. American Airlines (NASDAQ:AAL), of which Berkshire Hathaway owns a 10% stake, has lost nearly 70% year-to-date.
The Oracle of Omaha’s oil stocks have been hit equally hard. Occidental Petroleum (NYSE:OXY) has shed nearly 70% of its value since the year begun. Phillips 66 (NYSE:PSX), on the other hand, has lost about 54% year-to-date.
As interest rates approach zero, Warren Buffett’s stakes in financial stocks have suffered too. Most of Berkshire Hathaway’s financial shares have fallen by over 30% since the year started.
But if history is any guide, Buffett will outperform the market once the coronavirus pandemic is over.
Traditionally, Buffett has performed slightly better than the market during downturns. Once a recovery is underway, the Oracle of Omaha has tended to vastly outperform the market.
This pattern was apparent to Buffett over six decades ago. In a letter to his investing partners in 1957, Buffett wrote:
To some extent our better than average performance in 1957 was due to the fact that it was a generally poor year for most stocks. Our performance, relatively, is likely to be better in a bear market than in a bull market…
The downside of Buffett’s value-investing strategy has been trailing the market in bullish scenarios. Last year, for instance, the per-share market value of Berkshire Hathaway went up by 11% while the S&P 500 index appreciated by 31.5%.
Evidence of Buffett beating the market immediately after a downturn is in the plenty.
The 1968-1970 recession occasioned by relatively high inflation saw the market lose 8.4% in 1969 and gain only 3.9% in 1970. Once it was over, Berkshire Hathaway soared by 80.5% in 1971 while the S&P 500 index appreciated by 14.6%.
After the stagflation witnessed between November 1980 and August 1982, Berkshire Hathaway rose by 69% in 1983. This was more than three times the gains of the S&P 500 (22.4%) the same year.
After the 1987 market crash, Berkshire’s per-share market value rose 59% in 1988 and 85% in 1989. During the same years, the S&P 500 index recorded gains of just 17 and 32%, respectively.
The bursting of the dotcom bubble at the turn of the century provided another opportunity for Buffett to handily beat the market. While the S&P 500 index fell by 12% and 22% in 2000 and 2001, respectively, Berkshire Hathaway went up by 27% and 6.5%.
Earlier in the year, after being vastly outperformed by the market, Buffett’s value-investing strategy was declared dead. But once the coronavirus crisis is over and normal economic activity resumes, Buffett will get another chance to prove his doubters wrong.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:48 PM