What would Warren Buffett do in this market meltdown?

With the US stock market diving almost 20% in 2022, what would Warren Buffett do in this bear market? I suspect he’d keep on doing what he did in Q1 of this year.

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After three years of great returns, it’s not been a good year so far global investors. The S&P 500 index leapt by 28.9% in 2019, 16.3% in Covid-ravaged 2020 and 26.9% in 2021 (all excluding cash dividends). After such steep climbs, I feared the risks of a stock market crash were rising. Like my hero Warren Buffett, I became fearful when others were greedy.

US stocks take a tumble

On 3 January 2022, the S&P 500 hit its all-time high of 4,818.62 points. As I write on Thursday afternoon, the index stands at 3,891.91. In other words, it has lost 926.71 points — almost a fifth (-19.2%) of its value — since this record high. This takes the US stock market to the very brink of a bear market, defined as a 20% fall from a previous high. For the record, the index went even lower a week ago, crashing to 3,858.87 points on 12 May.

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It looks like Warren Buffett was right about over-exuberant investors getting carried away in 2020-21. As a result of recent price falls, some investors are panicking. They’re selling up and rushing to the exits, putting more pressure on already weakened share prices. As a result, the CNN Fear and Greed index is registering an Extreme Fear rating right now. Eek.

Warren Buffett loves market meltdowns

But guess what Warren Buffett does during times of extreme fear? He uses the awesome financial firepower of Berkshire Hathaway, his $667bn conglomerate, to snap up undervalued assets at discounted prices. For example, the Oracle of Omaha has placed these big bets on America’s future so far this calendar year:

  • Buying property and casualty insurer Alleghany Corporation for $11.6bn in cash
  • Taking a near-$8bn stake in oil producer Occidental Petroleum
  • Acquiring a $4.2bn stake in computer and printer manufacturer HP

In the first quarter of 2022, Buffett used Berkshire Hathaway’s colossal cash mountain to buy $51.1bn of US stocks. This reduced Berkshire’s cash from $147bn at end-2021 to $106.3bn at 31 March.

Recently, he also snapped up a $3bn stake in $97bn US bank Citigroup in what analysts describe as yet another value-hunting investment. To me, it’s very telling how much money the mega-billionaire (his personal fortune is around $109bn) is pouring into cheap stocks. This is a significant step from a legend who has spent much of the past six years sitting on the sidelines as asset prices skyrocketed.

I suspect Buffett would be buying now

Of course, I can’t possibly know what’s going on inside Warren Buffett’s magnificent, market-moving mind at present. But I suspect that his bargain-hunting brain is actively looking to buy into great companies at reasonable prices. As he’s said before: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

In summary, to answer the question in my title, I think Buffett would be buying — or gearing up to buy, at least — as stock prices head southwards in this latest slump. For what it’s worth, I’m planning to do the same. This year, while my family portfolio has suffered its largest-ever loss, we are also sitting on our biggest-ever cash pile. And as prices keep falling, we’ll keep buying cheap shares backed by solid earnings and good dividends!

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Cliffdarcy has no position in any of the shares mentioned. Citigroup is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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