When it comes to buy-and-hold investing, Berkshire Hathaway (BRK.A 3.75%)(BRK.B 4.02%) CEO Warren Buffett is king. Over the course of almost seven decades, Buffett has built up a net worth of around $80 billion, and helped to create in excess of $400 billion in value for shareholders of Berkshire Hathaway stock. And he's done this entirely by researching a handful of sectors, picking out businesses with perceived competitive advantages, and, most important, hanging on for the long haul.
But the thing about buy-and-hold investing is that Buffett's resolve is regularly tested. That's because the benchmark S&P 500 (^GSPC 3.06%) has undergone a correction – officially, a non-rounded decline of at least 10% from a recent high – an average of every 1.85 years since the beginning of 1950. Buffett has invested through the likes of the Black Monday decline in October 1987, the dot-com bubble, the Great Recession, and now coronavirus disease 2019 (COVID-19). Though Buffett's resolve results in big-time gains over the long run, there's substantial short-term pain to be felt during bear markets.
Since the S&P 500 hit its all-time closing high on Feb. 19, 2020, through what's now being referred to as "Black Thursday" on March 12, 2020, the benchmark index is off almost 27% in a mere 16 trading sessions. It's the quickest we've ever seen a bear market take shape, and it's cost the Oracle of Omaha quite a bit of money.
The bear market is wreaking havoc on Berkshire Hathaway's investment portfolio
Before the stock market rolling over, Berkshire Hathaway's portfolio, consisting of 52 securities, was worth approximately $257 billion. But as of the closing bell on March 12, Buffett's portfolio had shrunk in value to roughly $173 billion. On a nominal basis, Buffett has seen $86 billion in value erased as the stock market has plunged. And for Buffett, the pain has come from seemingly every industry and sector he has exposure to.
For example, tech behemoth Apple (AAPL 2.45%) and money-center giant Bank of America (BAC 0.72%) represent Berkshire Hathaway's two largest holdings by market value. When the S&P 500 was at its peak, Apple accounted for $79.3 billion in value and somewhere around 31% of Buffett's total portfolio. As of this past Thursday, March 12, Buffett's holding in Apple was worth $60.9 billion. Apple has been hit by supply chain disruptions in China, and may see similar struggles worldwide.
The same is true for Bank of America, which has seen its peak value in Buffett's portfolio fall from $31.9 billion to $19 billion. The big concern surrounding Bank of America being its reliance on net interest income. As the Federal Reserve looks to cut rates in order to spur lending activity, this'll work against BofA's earning potential. Combined, Apple and Bank of America account for $31.3 billion of Berkshire's $86 billion in "lost" value.
On a percentage basis, perhaps no Buffett stocks have been hit harder than airlines and oil stocks. American Airlines Group (AAL 7.09%) is down 53% over a span of 16 trading sessions, with its downside being fueled by a huge drop-off in consumer demand and President Trump's ban on inbound flights from Europe. Not to mention, American Airlines Group is the most-indebted of all major airlines, with close to $30 billion in net debt.
Meanwhile, Occidental Petroleum (OXY 2.55%) has been a massive drag for Buffett. Inclusive of its recent dividend, Occidental's stock has declined by 70% since Feb. 19. With Saudi Arabia and Russia gearing up for an all-out crude-pricing war, the price for a barrel of crude has nosedived. This ultimately caused Occidental to slash its dividend by 86% and significantly pare back its capital spending plans. This rapid decline the price of oil is especially worrisome with the company carrying around $41.4 billion in total debt on its balance sheet.
Short-term pain translates to long-term gains for Warren Buffett
But don't think for a moment that the Oracle of Omaha is panicked. This is, in fact, just the sort of market correction he's likely been waiting for to deploy some of Berkshire Hathaway's record cash hoard, which totaled $128 billion in its most recent quarter. Said Buffett in the company's 2018 shareholder letter:
In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.
The thing is, prices are no longer "sky-high for businesses possessing decent long-term prospects." This means Buffett will have undoubtedly gone shopping. Of course we won't find out the full details of what's been purchased until Berkshire Hathaway files its 13F with the Securities and Exchange Commission in mid-May.
Nevertheless, Buffett has offered plenty of clues as to what might be on his buy list. For instance, Buffett has pretty much been unwavering on his view that banks are his favorite industry. The Oracle of Omaha has built up what's currently a $5.2 billion position in money-center stalwart JPMorgan Chase (JPM 2.98%) since the third quarter of 2018. Whereas Berkshire owns stakes nearing 10% in a number of major money-center banks, Berkshire's stake in JPMorgan Chase is a modest 1.9%. Considering the aforementioned Fed rate cuts, as well as CEO Jamie Dimon's recent emergency heart surgery, there have been a number of events that have snowballed to send JPMorgan's stock lower. That just seems like the perfect recipe for Buffett to step in and buy, especially considering JPMorgan Chase's high-quality loan portfolio.
I could also see Buffett bucking auto industry concerns and modestly upping his stake in General Motors (GM 5.55%). Even though auto demand was already on the downswing well before coronavirus became a worldwide issue, the unprecedented mitigation measures taken by China to stem its spread, combined with a United Auto Workers' strike in 2019, have been a special one-two punch for General Motors that may offer an opportunity for patient investors. Plus, General Motors' dividend yield of 6.6% is probably calling Buffett's name.
The point is that, while Buffett is getting clobbered right now, his plan to buy high-quality businesses with competitive advantages and hold them for long periods of time works very well. The idea of buying and holding might seem unpalatable right now, but it can pay literal and metaphorical dividends over the long run.