Warren Buffett is widely regarded as the greatest investor of our time and for good reason. He has been investing for 80 years. He bought his first share at the age of 11 and his holding him Berkshire Hathaway (NYSE: BRK.A) has generated an average annual return of over 20% for shareholders since 1965.
BRK.A YCharts Total Return Level Data.
Hence, it is not surprising that investors look to Buffett’s investment business for insight into the state of the market. Buffett has been pretty stingy in recent years, but that has changed in 2022. According to the company’s May 13 filing in mid-May, Berkshire Hathaway has spent over $ 50 billion to buy stock as prices have dropped significantly. And with $ 100 billion in cash and short-term Treasury bills on Berkshire’s balance sheet, I’m willing to bet we’ll see many more purchases when the company releases its second-quarter 13F statement in mid-August.
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I believe now is a great time to buy stocks. Let’s unpack Buffett’s recent buying business to see why.
Stocks look very cheap
Part of Buffett’s investment strategy focuses on buying stocks below their intrinsic value, and with the recent decline, there are a lot of cheap stocks right now.
Consider Berkshire Hathaway’s recent $ 1 billion investment in Celanese Corporation (NYSE: CE). Celanese is a huge chemical manufacturer for industries ranging from pharmaceuticals to electric vehicles (and just about everything in between). While it’s impossible to know Berkshire Hathaway’s exact reason for buying more than 7 million shares in this company, it probably had to do with the valuation.
At current prices, the stock is trading for a price-to-earnings (P / E) ratio of 6, which is the lowest since 2009.
For comparison, the company’s biggest competitor, Du Pont de Nemours (NYSE: DD)is traded with an XP ratio of 19.
Like Buffett, investors should take advantage of the recent decline in stocks to buy quality assets at affordable prices.
There is both security and advantage in strong brands
Warren Buffett has long praised companies with loyal customer bases. A company’s brand strength is one of the most effective moats.
This is probably why Berkshire Hathaway has added to its position of Apple (NASDAQ: AAPL) equity, which now accounts for over 40% of its total equity portfolio.
According to a recent PCMag survey, 92% of iPhone users plan to keep the brand when they update their phones. In contrast, the iPhone’s two biggest competitors, Samsung Galaxy and Google Pixel, have experienced future retention rates of just 74% and 65%, respectively.
Apple’s brand loyalty is further observed by its Net Promoter Score (NPS) of 73, which is among the highest in the consumer electronics industry.
A Net Promoter Score is a metric produced by a customer survey to determine how likely they are to recommend a product to friends and family. Word of mouth marketing is one of the most effective ways to build brand loyalty, so this metric carries a lot of weight.
Time arbitrage is your biggest advantage
Buffett understands that the market is painfully focused on the short term. This is largely due to the compensation structure of institutional investors, but it is also a reflection of human emotions.
By simply extending your time horizon beyond that of the market, you give yourself a huge advantage.
It is certainly possible that stocks could continue to fall from current prices, but they are very likely to recover and move higher with sufficient time. In fact, the market has never failed to claim an all-time high, so history is on your side.
By focusing on buying stocks trading below their intrinsic value and those with strong brand loyalty, you can emulate the Oracle of Omaha and emerge from this bear market as a winner.
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Mark Blank has no position in any of the titles mentioned. The Motley Fool has positions and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $ 200 call on Berkshire Hathaway (B shares), long March 2023 $ 120 call on Apple, short January 2023 $ 200 put on Berkshire Hathaway (B shares), short January 2023 $ 265 call on Berkshire Hathaway (B-Shares) and short calls for $ 130 in March 2023 on Apple. The Motley Fool has a disclosure policy.