Is Warren Buffett feeling deja vu in 2024?
In the 1960s, growth stocks staged a big rally, with 50 of the top growth companies in cutting edge industries like technology and pharmaceuticals, becoming so popular they were called the “Nifty 50.”
The Nifty 50 were considered “sure things” with investors willing to pay as high as 50x earnings to own the stocks under the belief that those innovative companies would keep growing at a fast pace forever.
By 1969, Buffett found nothing of value to buy, so he dissolved his investing fund and moved to the sidelines.
And he waited.
The party finally ended in 1973, as the Arab Oil Embargo, a recession and the inflation that followed, rippled through the world’s global stock markets.
When the sell-off was over, the Dow had fallen 45% in 2 years.
Suddenly, there were many value stocks and Warren Buffett came back into the game, this time as CEO of Berkshire Hathaway.
In a now infamous 1974 interview with Forbes Magazine, Buffett could barely contain his giddiness.
Forbes asked how he felt about the market opportunities after the big sell-off and he replied “Like an oversexed guy in a harem. This is the time to start investing.”
Buffett Prepares for Buying Opportunities
In the Forbes interview, Buffett talked about how 1974 reminded him of the early 1950s, when the Great Depression bear market finally ended and stocks were cheap.
“Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices,” he said in 1974.
Sound familiar?
Buffett has been mostly on the sidelines for much of the past decade, building a massive $325 billion cash position in Berkshire Hathaway. His last mega-deal was when he spent $26 billion to buy Burlington Northern railroad in 2009. He famously didn’t even buy any new stocks in the March 2020 coronavirus crash.
But suddenly, in 2022, with stocks off their highs by double digits, Buffett’s Berkshire Hathaway deployed $51 billion of the cash hoard into energy stocks like Occidental Petroleum and Chevron.
He has since been accumulating even more cash as stocks continue to race to new highs.
Buffett may have been giddy over the buying opportunities in stocks in 1974, but it turned out that the rest of the decade was a golden era for value investors too.
Will that be the case in this decade too?
Continued . . .
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What Buffett’s Selling Signals to the Market Today
1) It’s Okay to Sell Your Winners
Apple has been in the Berkshire Hathaway equity portfolio since 2016. Buffett has described it as one of the 4 pillars of Berkshire Hathaway. It’s one of the company’s key foundations.
That’s why the sale of a big chunk of shares in 2024 shocked Wall Street. Why is he selling a part of the 4 pillars?
Buffett claimed at the May 2024 annual meeting that he sold Apple for tax reasons. Whether that’s true, or not, it does confirm a valuable lesson: that it’s okay to sell your winners.
You don’t have to sell a complete position. Buffett hasn’t. You can sell, say, 50% of a big winner and let the rest ride.
But it’s okay to sell and take your profit.
2) Cash Is King
Several times in his career, specifically in the 1970s and 2000s, Buffett has been able to get “deals” from others in distress because he had a strong cash position. During the financial crisis, banks were calling him directly looking for a bailout.
Berkshire Hathaway now has an incredible cash position of $325 billion. It has plenty of firepower should buying opportunities present themselves in the next few years. And, meanwhile, the cash is earning 5% in US treasuries.
3) Patience Wins in Stock Investing
In the late 1960s, early 1970s, Buffett waited about 5 years from the time he wound down his original investment fund to becoming CEO of Berkshire Hathaway. That’s a long time to wait on the sidelines.
But patience wins. Recently, Buffett has stopped buying shares of his own company, Berkshire Hathaway, whose valuation has touched on new all-time highs. Previously, he vowed that he wouldn’t buy back shares of Berkshire unless they were cheap.
Even on his own company buybacks, he’s willing to be patient. You should be too.
While it seems like stocks will go up forever, there will always be buying opportunities in great companies.
Buffett Gets Out the 1970s Playbook
We’re already seeing Buffett, and Berkshire Hathaway, mimicking the strategy of the 1970s.
Like the Nifty 50 growth stock era, where companies like Xerox were going to grow forever, there is a bit of speculative behavior again in 2024 with the AI Revolution.
In the 1970s, while the stock market indexes lagged until 1981, the top value managers like Buffett and Fidelity’s Peter Lynch became investing legends as they found buying opportunities. Value investing saw great success.
There will be new investing legends created in this decade’s rally as well.
Are you ready to take advantage of the value stock opportunities?
Profiting from Buffett’s Approach in 2024 and Beyond
The Oracle of Omaha explained the essence of his wealth-building like this: “whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Even after the post-election surge, are still a surprising number quality stocks at “marked down” prices.
Which are the best stocks to buy right now?
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Good Investing,
Tracey Ryniec
Stock Strategist Tracey Ryniec is editor in charge of Insider Trader and Value Investor portfolios.
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