Although Warren Buffett can’t predict the future, he almost certainly wasn’t surprised by the Nasdaq Composite (NASDAQINDEX: ^IXIC) falling into correction territory. In fact, based on the investment decisions he and his team have been making at Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), it seems likely that he was rather expecting something like this to happen at some point. But the real takeaway for investors from the correction and from Buffett is much bigger than just a few months of stock performance. Here’s why.
Warren Buffett has never publicly explained the nitty-gritty details of his investment approach. But it’s something along the lines of buying good companies when they are attractively priced and then holding them for the long term. The goal is to benefit from the growth of the underlying businesses over time. Some of his most iconic investments are household names, including Coca-Cola and American Express.
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The graph above shows the revenue per share growth and the stock price growth for both of these companies over the long term. Notice how the two metrics rise in the same general direction. There are two components to Buffett’s approach that are important here.
First, when he bought each of these companies, they were far cheaper, valuation-wise, than they are today. Buying attractively priced stocks was a lesson Buffett learned from Benjamin Graham, often referred to as the father of fundamental analysis and a devoted value investor. The second piece of the puzzle, long holding periods, came from Philip Fisher and Buffett’s late business partner Charlie Munger, both of whom focused more on the growth potential of businesses over time.
In fact, it’s likely that Munger helped move Buffett from a deep value approach to one that considered a reasonable valuation attractive enough for a “good” company. Coca-Cola and American Express, for example, have both proven to have the durable and growing businesses that merit the long-term ownership of their stocks.
Image source: The Motley Fool.
You simply can’t find a lot of good companies trading at reasonable prices in an overvalued market. Buffett’s awareness of that situation shows in his company’s 2023 annual report, where he said:
There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.
Reading into the Oracle of Omaha’s words just a little, he was basically explaining that there was nothing attractive for Berkshire Hathaway to buy. In fact, as the market continued to rise in 2024, he and his team spent much of last year selling assets. He exited an opportunistic investment in Bank of America (NYSE: BAC) and reduced his stake in Apple (NASDAQ: AAPL) following the rise in that company’s stock. This was no small decision. The company’s cash balance grew from roughly $168 billion at the end of 2023 to $334 billion a year later.
It seems reasonable to believe, given his 2023 comment, that Buffett and his team had chosen to sell assets into a market that he viewed as expensive. The plan is most likely to use that cash during a market pullback to buy stocks as they become more attractively priced.
Here’s the real crux of the situation and why it’s highly likely that Buffett hasn’t been the least bit fazed by the Nasdaq correction. Graham, one of Buffett’s most influential teachers, was constantly talking about the role emotions play on Wall Street. He even told a now-iconic story to convey the idea, creating the fictional character Mr. Market.
To paraphrase, Mr. Market is your partner. He’s willing to buy and sell the business you share every day. Some days, he’s reasonable and offers you prices that are justifiable. Other days, he’s despondent and will sell you his half of the business at rock bottom prices. And still other days — and this is the important one right now — he is jubilant and will offer to buy your half of the business for a shockingly generous price.
For the last couple of years, Mr. Market has been jubilant. Now he’s starting to show signs that he’s beginning to feel a little despondent. Thanks to Graham, Fisher, and Munger (and Buffett’s own unique personality traits), Buffett is capable of seeing the market’s emotional swings for what they are, and he’s capable of waiting for the emotional swings to take shape over time. Buffett will comfortably hold cash on his company’s balance sheet while he waits for the right business to come along at the right price. Then, and only then, will he start buying.
In the meantime, Buffett isn’t letting the market’s gyrations bother him. He’s comfortably holding on to the good companies he owns, like Coca-Cola, and waiting for intriguing opportunities to buy new companies to arise. History has taught him that, if he is patient, this will eventually happen. He simply isn’t rushing to do anything, and neither should you.
If you own good companies with long-term growth appeal, sit tight. History suggests you’ll be just fine over the long term, even if this correction turns into a full-blown bear market. If you have cash, don’t rush to put it into the market. Wait for the right opportunity to buy a company you believe is both good and attractively priced. But most of all, don’t panic. The market just gets this way sometimes. Its mood will change direction again soon enough.
If you need something to divert your attention from focusing too much on the market’s ups and downs, try reading (or rereading) The Intelligent Investor by Graham, Common Stocks and Uncommon Profits by Fisher, or Poor Charlie’s Almanack by Munger. If these investors helped mold Buffett’s investment approach, their wisdom, born of experience, will probably help you become a better investor, too.
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American Express is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
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