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Here's How the Buffett-Style Investor Should Read the Upcoming Earnings Season

By Howard Smith – Updated Apr 22, 2020 at 11:36AM

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A look back at other market crashes tells us this too shall pass.

In his annual letter to shareholders as chairman of Berkshire Hathaway (BRK.A 2.03%) (BRK.B 2.21%), Warren Buffett made some poignant observations. He wrote, "Whatever the downsides may be, strong and immediate action by government was essential ... like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat." Buffett went on to remind people that America has had its share of challenges and has overcome them all. 

But Buffett didn't write this in the letter he just put out this year. He wrote those words 11 years ago. Buffett also wrote, "We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."

These words, and his perspective, seem apropos for today. Things changed so quickly, and the country's economy and citizens need fiscal and economic stimulus. And the outlook going forward is very uncertain. 

up market arrow erased turning into down arrow

Image source: Getty Images.

Big picture perspective

At times like this, it's important to remember back to other bear markets when businesses were struggling. Buffett couldn't have known it at the time, but the bear market from the Great Recession bottomed only weeks after he put out his shareholder letter. Something that helps Buffett, and should help Berkshire shareholders, is knowing the diversified nature of the businesses the company owns and in which it is invested.

So let's look ahead ourselves at how we should endure what is sure to be a difficult upcoming earnings season. Just like Berkshire, having a diversified portfolio containing proven blue-chip companies is something that investors can rely on to get through bleak earnings.

down arrow with cash and coins indicating bad earnings

Image source: Getty Images.

Looking back, to look ahead

Say, among your diversified portfolio, you have stalwarts like Home Depot (HD 1.62%) and Walt Disney (DIS 3.71%). Whether from the upcoming earnings results, or perhaps the outlook, there is likely to be bad news even with proven companies like these.

Home Depot has remained open during the pandemic crisis, and may even see a short-term surge in earnings as many people take advantage of being home to work on projects. But economic hardship that goes along with a recession or worse won't benefit any consumer business, including Home Depot. And it's hard to see how Disney will have much good news in its report. Its theme parks are closed (with employees furloughed), cruise ships idled, movie releases on hold, and networks without sports to broadcast. The relatively new Disney+ streaming service may be one bit of positive news. 

A look back in time, however, shows that riding through recessions with companies like these in your portfolio has paid off. 

SPY Chart

SPY data by YCharts

Looking back 20 years takes us through two previous recessions, in 2008 and 2001. In the bigger picture, the price drops around these recessions are just a blip on the chart. And holding these stalwarts through the tough times has rewarded shareholders in the long run.

Long-term view

A look at the businesses should make shareholders feel good, too. Disney made a major acquisition last year with most assets of Twenty-First Century Fox, and it has jumped into television streaming with the successful launch of the aforementioned Disney+ service. Home Depot launched its One Home Depot plan in 2017, and continues the $11 billion investment strategy focusing on the digital sales experience, and attracting more professional customers. 

With both Home Depot and Disney investing for the future, there is reason to believe that their businesses -- and stocks -- will return to growth just as in past troubled times. Approaching this earnings season with a Buffett-like long-term view should allow investors in solid, proven businesses to stay the course and be better for it. 

Howard Smith owns shares of Berkshire Hathaway (B shares), Home Depot, and Walt Disney and has the following options: long January 2021 $120 calls on Home Depot, long January 2021 $80 calls on Walt Disney, and short September 2020 $215 calls on Home Depot. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Home Depot, and Walt Disney and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $60 calls on Walt Disney, long January 2021 $120 calls on Home Depot, short January 2021 $210 calls on Home Depot, and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
$100.73 (3.71%) $3.60
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$421,692.63 (2.03%) $8,392.63
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$278.83 (2.21%) $6.03
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$288.29 (1.62%) $4.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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