Until the pandemic hit, some analysts were calling Warren Buffett “washed up.” The performance of his company, Berkshire Hathaway, had badly trailed the S&P 500 index for years.
But then came some of the wildest and most unpredictable market moves in the past half-century…and in the midst of it all, 92-year-old Buffett launched an epic comeback. Over the past year, Berkshire Hathaway stock has trounced the S&P 500 returns by 10 percentage points, and its 10-year annualized performance suddenly stands at 13% versus the S&P’s 11%.
None of this should come as a surprise says leading “Buffettologist” Robert L. Bloch. The core of Buffett’s success has always been his ability to withstand and capitalize on stock markets at their most volatile.
Bottom Line Personal asked Bloch—whose father cofounded the tax-preparation giant H&R Block, in which Buffett was once a shareholder—for his insights into why Buffett handles volatility so well and how his insight can improve your own investment performance…
Secrets to Handling Volatility
I’ve spent the past decade scouring Buffett’s letters and annual reports and corresponding with the Sage of Omaha himself. His simple, pithy observations—which cut to the heart of being smarter with money—have served as guideposts for my own portfolio, which has matched the S&P over the past decade.
The following five Warren Buffett statements are worth taping to the side of your computer screen…
When hamburgers go down in price, we sing the “Hallelujah Chorus” in the Buffett household. When hamburgers go up in price, we weep. There’s just something about investing that makes people behave irrationally. Wall Street is the only place that a consumer with cash to spend actually laments when there is a drop in prices. Investors would rather wait until markets are rising, commentators are upbeat and stocks are expensive to load up. I guess following the herd just feels safer.
But Warren Buffett says that you pay a heavy price for that kind of reassurance. He deals with volatility so well because he regards falling prices as long-term bargains, not short-term losses. And the losses really are relatively short-term when you think about it.
Since 1928, the average “breakeven point” from the bottom of a bear market back to precrash levels took 26 months—or just over two years. The breakeven point for the 2020 bear market was just four months.
For Buffett, bear markets and corrections are also the only time he can find bargains among the highest-quality companies that rarely trade at discounts.
I buy on the assumption that they could close the market the next day and not reopen it for five years.The one quality that you need so that you can invest like Warren Buffett is patience. He doesn’t make rash, what-was-I-thinking moves in down markets because the daily price of any stock he owns is irrelevant to him. He is buying a piece of an actual business, not a fluctuating number in the ticker crawl at the bottom of the screen on CNBC.
Why does Buffett refer to a five-year time period? When he analyzes a business, he needs to be able to feel very confident that he can estimate its expected earnings over the next five years. Then he checks to see if the stock is selling at a reasonable price in relation to those estimates. If Buffett can’t get a handle on a company’s future earnings, he moves on to other prospects.
Day-to-day stock prices are driven by rumor and sentiment, but the underlying potential of a solid, high-quality business tends to remain the same. This mindset of focusing on the playing field—and not the scoreboard—leads Buffett to avoid investment moves for years at a time. He once cracked that the cornerstone of his investing philosophy is “lethargy bordering on sloth.”
The last thing you’d want to do is hold money during a war. This year’s invasion of Ukraine by Russia caused many investors to dump stocks and rush to the safety of cash, US Treasuries and gold—and that is definitely understandable. The uncertainty of war is scary, and it’s hard to gauge how geopolitical events will play out over time.
But Buffett’s wartime playbook is clear—he doesn’t time the stock market. Back in 2014, when Russia invaded and subsequently annexed the Crimean Peninsula from Ukraine, Buffett said he wasn’t selling stock even if the conflict escalated into another Cold War or World War III.
Buffett’s reasoning: The value of money historically falls in wartime, and gold has an inconsistent record. Since World War II, there have been nearly 20 major military operations involving the US, but an investment in gold around WWII would not have appreciated nearly as much as an investment in stocks.
On the other hand, war renders little damage to stock valuations over the long term. Equity prices are determined by corporate revenues and profits, not overseas fighting.
Big opportunities come infrequently…reach for a bucket, not a thimble. For Buffett, it’s not enough to control your fears during volatile times. You need to be bold. Much of the Buffett legend—and some of his most lucrative deals—were forged in stock markets that everyone else was fleeing.
A profile of Buffett’s courage: September 2008 was the start of an unnerving chain of events in this country. Lehman Brothers became the world’s largest bankruptcy ever. The S&P 500 fell by as much as 43%.
Soon after, General Motors, the world’s largest automaker, went bust and confidence in the fundamental structures of the economy began to shatter.
It was at that point that Berkshire Hathaway struck a deal with the investment bank Goldman Sachs, which was in desperate need of cash. Buffett agreed to purchase $5 billion in special preferred shares of the company, paying a 10% annual dividend. As soon as Goldman Sachs stabilized, he sold the shares, earning about a 60% return on his investment.
These days, when I see Buffett making bold moves, I register that as a sign to start looking for opportunities.
This past March—after several years of sitting on the sidelines—Buffett suddenly made some large purchases. He reached an $11.6 billion deal to buy insurer Alleghany for an attractive price…and also spent more than $8 billion purchasing an 18.7% stake in the oil producer Occidental Petroleum.
The dynamism embedded in our market economy will continue to work its magic. It feels like we live in the most perilous of times—a once-in-a-century pandemic…soaring inflation…a bitter divide between red states and blue states…ominous talk of the American Empire on the decline. It’s easy for investors to develop a mindset of fear and negativity, which unfortunately leads them to overreact to market volatility.
Buffett is able to stay the course because he has an unwavering belief in the larger, long-term forces that are fueling and shaping the stock market. He is not being Pollyannaish. The truth is, our country has faced much greater problems than we are facing today, yet the American miracle has always prevailed, allowing American businesses to flourish.
One of Buffett’s favorite stories: In 1942, he was 11 years old and had $114.75 in his bank account, a life savings he had accumulated since the age of six. Buffett notes that if he had put his money in the equivalent of a broad stock market index fund, reinvested the dividends and never touched it, his stake would be worth about $600,000 today.