Until last month, Warren Buffett – one of the greatest investors of all time – wasn’t too popular.
After years of his company Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) underperforming the S&P 500 and the broader US markets, investors were starting to question whether the great man had lost his magic touch.
This was a near 90-year-old investor with a famous non-interest in tech-related stocks after all – which have been some of the best-performing companies over the past decade. Not that Warren Buffett doesn’t like tech, he just has trouble understanding tech businesses – and Buffett notoriously only invests in what he understands.
So here’s Buffett, sitting on the sidelines hoarding cash, not investing in a stock market going gangbusters. In fact, by the end of last year, Berkshire Hathaway held the most cash it ever has in history – over US$128 billion. His fellow shareholders were beginning to scratch their heads, wondering why they were investing in a company that was not making money when everyone else was.
But my, how the tables have turned.
Today, the US markets and the S&P/ASX 200 Index (ASX: XJO) are down considerably from the highs we saw in February. And last month, we were looking at a market that was close to a 40% peak-to-trough drop (which has recovered somewhat since).
Suddenly, Buffett looked like a genius again – a genius with a US$128 billion war chest ready to put to work in a heavily sold-off market.
Buffett’s magic touch
The thing is, this has happened before. In the 1999-2001 tech bubble, Buffett was doing exactly the same thing: hoarding cash while every other investor was enjoying a euphoric market. Buffett was also dismissed as an old man with no understanding of the coming internet boom.
But Buffett had the last laugh when the markets crashed back down to earth and he was able to deploy his war chest into cheap shares.
It’s a modus operandi that has helped him become one of the richest people on the planet.
So if you were wishing you had more cash to invest in shares last month, just think of what Buffett has been doing for the last few years. Patience is always a virtue, but it’s even more so in investing. So as the markets are hovering well above the lows that March brought, I think it’s a good time to get some more cash ready to go and build up a war chest of your own.
We don’t know what will happen for the remainder of 2020. But I think there’s a significant possibility that we haven’t seen the last of the volatility that March brought us.
So if you’re putting money into shares thinking you’ve ‘missed the bottom’, think again. That’s not a path Buffett has ever taken, and maybe stocking up the rainy day fund once more might be a better idea.
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares) 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), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.