Warren Buffett is probably the best known investor worldwide. The 92-year-old has amassed a fortune worth over $100bn — as of late 2022. So, understandably, many investors hang on his every word.
Over the last couple of weeks, the market has slumped. Stocks, particularly financials, experienced moderate corrections.
But did the so-called ‘Oracle of Omaha’ see it coming? Let’s take a closer look.
Buffett pulled back
Buffett is the chairman and CEO of Berkshire Hathaway. But there’s something in its Q4 results that caught the eye of some investors.
So what is it? Well, between 30 June 2022 and the end of Q4, Berkshire Hathaway’s cash, cash equivalents, and treasury securities grew from $105.4bn to $128.7bn.
This means Buffett increased the company’s cash and treasuries position by $23.3bn during the six-month period. That’s considerable and some investors saw it as a warning.
So did Buffett see a stock market correction coming? It’s entirely possible, and probably the most likely reason for pulling back.
But, equally, it could be the case that he thought there were better opportunities than the company’s existing holdings.
It’s also worth noting that Buffett has always said he doesn’t want Berkshire Hathaway to be strapped for cash.
What’s he doing now?
Well we don’t know for sure, but we know about Buffett’s investment strategy — buying value. The multi-billionaire looks to buy stocks that are trading for less than their book or intrinsic value. And, naturally, these stocks are easier to find in bear markets.
“Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price,” the legendary investor once said.
We also know that Buffett tends to focus on blue-chip stocks. He says he’d rather pay a fair price for great company than a great price for a fair company. That gives us an idea of the companies he prefers — Apple, Coca-Cola and, recently, Occidental.
So with share prices falling across most sectors, but especially financial stocks, I’d assume Buffett is topping up on his favourite businesses. Buffett once said that “net buyers” of stocks benefit when the stock market goes down.
Can I invest like Buffett?
It’s important to remember that sometimes share prices fall for good reasons. So I need to ensure that I’m not buying junk.
There are several ways we can invest like Buffett. Firstly, we need to stick to quality, but we also need to find out whether these stocks are undervalued or not.
We can start by looking at near-term metrics such as EV-to-EBITDA, or the price-to-earnings ratio. In order for these to be useful, we need to compare stocks in the same sector.
Then there’s the discounted cash flow (DCF) model. This calculation can be more challenging, but it also provides us with a better idea of a company’s value.
Buffett doesn’t really invest in the UK, and I don’t invest all that much in the US. So, right now, I’m investing in UK value stocks, and I assume Buffett is doing the same in the US.
I’m primarily focusing on financial stocks like Barclays which could be undervalued by as much as 73%, according to a DCF calculation.
