While you probably don't need the reminder, it's been a pretty awful year on Wall Street. Following a peak decline of just 5% for the broad-based S&P 500 (^GSPC -0.01%) in 2021, the benchmark index has plunged as much as 28% in 2022 and firmly entrenched itself in a bear market. The tech-driven Nasdaq Composite (^IXIC -0.48%) has performed even worse, with a peak-to-trough decline of 38% from its November 2021 all-time high.
But you'd never know we were in a bear market based on Warren Buffett's performance at Berkshire Hathaway (BRK.A 0.89%) (BRK.B 0.90%). Through this past weekend, Berkshire's Class A shares (BRK.A) were up 1% year to date, which is a 20-percentage-point outperformance to the S&P 500, which is down 19% this year.
You'd be jovial like Warren Buffett, too, if your company's stock was outperforming the S&P 500 by 20 percentage points in 2022. Image source: The Motley Fool.
Outperforming Wall Street is something the Oracle of Omaha has done consistently since taking the reins at Berkshire Hathaway in 1965. Berkshire Hathaway's Class A shares have lapped the total return, including dividends paid, of the S&P 500 120 times since the beginning of 1965 (3,641,613% vs. 30,209%). What's more, Buffett's company has outpaced the S&P 500's annual total return in 38 out of 57 years.
What's Warren Buffett's secret to crushing the 2022 bear market and consistently outpacing the S&P 500 over the long run? Let's take a closer look.
Buffett stays the course and trusts his investment thesis
To begin with, Warren Buffett and his investment team take a long-term approach when buying most securities. Although there are exceptions to this rule, such as the Activision Blizzard arbitrage opportunity, the vast majority of stocks Warren Buffett and his team purchase tend to be held for years, or even decades, at a time.
The advantage of having a long-term mindset and trusting in his investment thesis is that emotions tend to have little or no effect on the Oracle of Omaha's investment strategy. Buffett has previously navigated his company through dozens of stock market corrections and fully understands that high-quality businesses aren't materially impacted by a temporary shift in investor or consumer sentiment.
He plays a simple numbers game that favors the patient
To somewhat build on the previous point, Warren Buffett plays a numbers game with Berkshire Hathaway's investment portfolio that strongly favors patient investors.
Peruse the roughly four dozen stocks Berkshire Hathaway holds in its investment portfolio, or the five dozen companies it's purchased over five decades, and you'll notice a common theme: They're almost always cyclical. Cyclical companies ebb-and-flow with the U.S. economy.
The thing is, periods of economic expansion tend to last substantially longer than recessions. By packing Berkshire's investment portfolio with companies that can take advantage of long-winded expansions, Buffett and his team can simply sit back and reap the rewards of their patience and foresight over many years.
Image source: Getty Images.
Dividend stocks play an important role
An oft-overlooked reason for Berkshire Hathaway's immense success is dividend stocks. Berkshire's investment portfolio has more than 30 securities paying a regular dividend, with Buffett's company on track to collect more than $6 billion in dividend income over the next 12 months.
Publicly traded companies that pay a regular dividend are almost always profitable on a recurring basis -- otherwise they couldn't afford to pay a regular dividend -- and they're usually time tested. These are businesses that have demonstrated their ability to navigate tough economic conditions and eventually come out stronger on the other end.
What's more, income stocks have a tendency to leave non-paying stocks eating their dust. According to a report issued in 2013 by J.P. Morgan Asset Management, a division of JPMorgan Chase, publicly traded companies that initiated and grew their payouts between 1972 and 2012 averaged a 9.5% annual return over this four-decade stretch. Comparatively, public companies that didn't pay a dividend trudged to a 1.6% annualized return in this same time frame.
The Oracle of Omaha and his investment team have cash at the ready to deploy
Warren Buffett's outperformance during the 2022 bear market is also a reflection of being greedy when others are fearful. Berkshire Hathaway was sitting on well over $100 billion in cash and U.S. Treasuries not that long ago. However, Buffett and his team put tens of billions of dollars to work buying high-quality stocks at a discount as the broader market plunged.
All told, the Oracle of Omaha and his team have purchased 19 stocks in 2022. In particular, Buffett has used this heightened period of uncertainty to build the company's top holding in Apple, as well as make energy the third-largest sector by market value in Berkshire Hathaway's portfolio. Loading up on shares of Chevron and Occidental Petroleum is a pretty clear indication that Buffett and his team expect crude oil and natural gas prices to remain elevated for years to come.
Buybacks are hitting home
Lastly, Berkshire Hathaway's buybacks have made a difference.
Prior to mid-July 2018, Buffett and his right-hand man Charlie Munger effectively had their hands tied and weren't able to repurchase any shares of their company for more than a half-decade. But thanks to the board of directors updating the rules for repurchases a little over four years ago, Berkshire's dynamic duo has overseen more than $63 billion worth of buybacks.
Buying back stock offers two notable advantages. It increases the ownership of existing shareholders, and for companies like Berkshire Hathaway with steady or growing net income, it has the ability to boost earnings per share as the number of shares outstanding declines. That can make Berkshire even more fundamentally attractive to investors.
It's this confluence of factors that has helped Warren Buffett absolutely crush the 2022 bear market.
