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How Does Warren Buffett Perform when US Stocks Fall?

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  • US stock markets have fallen this year after the strong rally in 2019. So far, Berkshire Hathaway has only outperformed the S&P 500 by a small margin in 2020.
  • Warren Buffett lagged the stock market returns last year by a wide margin. Meanwhile, history tells us that Buffett tends to outperform the S&P 500 during falling markets.
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Warren Buffett and US stock markets

Warren Buffett, Berkshire Hathaway’s chairman, is one of the most admired investors of all time. Despite Berkshire’s returns lagging the S&P 500 last decade, Buffett was a massive fan following. Meanwhile, based on the previous week’s closing prices, Berkshire Hathaway (NYSE:BRK.B) B shares have lost 20.7% this year. The S&P 500 (NYSEARCA:SPY) has fallen 21.4% during this period. While Berkshire’s year-to-date outperformance doesn’t leave much to talk about, Buffett has generally fared well when stocks fall.

Berkshire Hathaway versus the S&P 500

Between 1965 and 2019, the S&P 500 (with dividends included) has been in the red for 12 years. Warren Buffett outperformed the S&P 500 in ten of the 12 years. In only two years, Berkshire Hathaway lost more than the S&P 500. There have been instances when Berkshire Hathaway shares closed with gains even when the S&P 500 delivered negative returns. In 1977, Berkshire Hathaway shares gained 46.8%, while the S&P 500 with dividends lost 7.4%. However, every stock market crash is different. The coronavirus has caused the current sell-off. Most companies have been impacted by the virus. Some sectors, like aviation, have taken a bigger hit. While Warren Buffett wasn’t very positive about the aviation sector a few years ago, he has gradually taken stakes in leading US airlines.

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Can Warren Buffett outperform in 2020?

Last year was disappointing for Berkshire Hathaway investors. The stock underperformed the S&P 500 by the widest margin in a decade. Given Berkshire’s mammoth size, Warren Buffett doesn’t expect a significant outperformance now. Berkshire’s surging cash pile was among the reasons behind the stock’s underperformance last year. Being a value investor, Warren Buffett didn’t see many opportunities in the stock market. He couldn’t find a suitable acquisition target amid fierce competition from hedge funds.

Berkshire Hathaway in 2020

The US stock market crash could bring back the valuations to levels where Warren Buffett might aggressively buy stocks. Businesses hit from the coronavirus might look out for capital. Berkshire Hathaway’s massive cash pile would be handy. Warren Buffett invested in Goldman Sachs and General Electric (NYSE:GE) in 2008. Since then, he has exited GE. Buffett also trimmed his stake in Goldman Sachs in the fourth quarter of 2019. In 2018, there were some rumors that Berkshire Hathaway might invest in GE again. However, Buffett denied the rumors. If the financial pain from the coronavirus remains for a long period, some companies might look up to Buffett for capital.

Notably, Pershing Square Capital Management’s Bill Ackman revealed earlier this month that he added Berkshire Hathaway shares amid the US stock market crash. Read What Are Ackman and Tepper Doing As US Stocks Fall? to learn more.

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