The last eight weeks have most certainly tested the resolve of investors.
The spread of the coronavirus disease 2019 (COVID-19), which has been confirmed in almost 1.6 million people and led to more than 95,000 worldwide deaths, along with the mitigation measures implemented to slow its transmission, are likely to thrust the U.S., and perhaps even global economy, into a recession.
As a result of these COVID-19 uncertainties, U.S. equities were pushed into the fastest bear market in history. It took a mere 17 trading sessions for all three major indexes to move from their recent highs to at least a decline of 20%, which is the threshold for an official bear market.
For many investors, the swiftness of this decline led to some very large paper losses. But none of these unrealized losses are likely to rival the tens of billions of dollars in market value Warren Buffett has seen "disappear" in recent weeks. Buffett, the CEO of conglomerate Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.50%), saw nearly $90 billion of his company's $257 billion in invested assets (as of mid-February) wiped away during the coronavirus crash.
And yet, even after this tumultuous couple of weeks, there's no question that Warren Buffett remains the most successful investor of our time. After all, between 1964 and 2019, Berkshire's per-share market value has increased by (drum roll) 2,744,062%, compared to a "meager" 19,784% for the broad-based S&P 500, including dividends, over the same period.
The reason Buffett has been so overwhelmingly successful as an investor has to do with his approach to investing in bear markets. Here are three of Buffett's not-so-secret "tricks" to thrive during bear market declines.
1. Buy with the intent of holding for a long period of time
First of all, when Warren Buffett buys a stock, his intention is almost always to hold onto it for an extended period of time. For instance, Coca-Cola (KO 0.08%), Wells Fargo, American Express, and Moody's which are all top-nine holdings in Berkshire Hathaway's portfolio in terms of market value, have been held for 31, 30, 27, and 20 respective years. In fact, the average top-10 holding for Buffett has been owned an average of 32 quarters (8 years).
Duration of holding is especially important to Buffett considering the role that compounding has played in growing the Oracle of Omaha's wealth, as well as that of Berkshire's shareholders. For example, Buffett has held Coca-Cola for so long that its annual payout of $1.64 per share equates to a 50.5% annual yield based on Berkshire's initial cost basis of around $3.25 per share.
Even when bear markets and recessions strike, the long-term investment thesis for Buffett's stocks often remains unchanged. With Coca-Cola, it has unparalleled geographic reach, 21 brands that have billion-dollar annual sales potential, and an astute marketing department that knows how to engage consumers.
Since most high-quality businesses grow their earnings over time, Buffett simply buys and allows time to do its thing.
2. Invest regularly, and always have dry powder at the ready
The second thing Buffett does that's made him so successful during bear markets is to invest regularly. Rather than trying to time a bottom, which Buffett would tell you is pointless, the Oracle of Omaha aims to buy wonderful companies at a fair price. Whether the market is down 10% or 30% from its peak matters not to Buffett. He only cares about snagging great businesses at attractive valuations on a regular basis. In fact, you'll note that Buffett is almost always a net-buyer of equities, regardless of how well or poorly the stock market is performing.
Warren Buffett is also no stranger to having a fair amount of capital on hand to strike when the iron is hot. The Berkshire CEO has previously stated that $30 billion is the ideal level of cash for his company to maintain to take advantage of earnings-accretive acquisition and investment opportunities.
Interestingly enough, Berkshire ended 2019 with a near-record amount of cash on hand ($128 billion), which is primarily the result of not making a major acquisition in four years. This has left Buffett with ample dry powder to buy high-quality businesses during this bear market.
3. Stick to sectors and industries you know and that interest you
The third factor that makes Warren Buffett such a successful investor in bear markets is that he generally sticks to the industries and sectors that he knows inside and out. In Buffett's view, "Diversification is protection against ignorance. It makes little sense if you know what you are doing."
For instance, you might have noticed that around 87% of Buffett's portfolio is comprised of stocks from just three sectors: financials, information technology, and consumer staples. And let's be honest, Apple makes up close to a third of Berkshire's invested capital, and it's the only information technology stock the Oracle of Omaha currently owns. Thus, Buffett primarily focuses his research efforts on financials (banks, insurers, and credit-service providers) and consumer staples.
This isn't to say that Buffett hasn't had success investing in sectors beyond his traditional scope of knowledge. Both cable operator Charter Communications and satellite-radio operator Sirius XM have fared just fine. However, what few duds Buffett has produced tend to come from sectors outside his traditional scope of knowledge. The recent underperformance of airlines and oil stocks in Berkshire's portfolio are perfect examples.
By predominantly sticking to sectors where Buffett exhibits his greatest wealth of knowledge (and interest), he's given Berkshire Hathaway the best chance to outperform during bear markets and over the long run.