Warren Buffett swoops when stocks are weakest

It’s hard to recall a time when Warren Buffett has not chosen to make major purchases when the market was weak. Picture: AFP

A common conversation among investors these days is whether they should sell their stocks and move to cash, or hedge against a potential decline.

Strategists helping investors find stocks to profit off COVID-19-triggered changes in working and living are now increasingly dealing with clients wanting to hedge their portfolios.

As this hedging conversation occurs, one of the world’s most admired investors has finally revealed what’s on his mind.

Warren Buffett’s Berkshire Hathaway bought $US1.2bn ($1.7bn) of Bank of America stock from July 20 through July 27, paying an average price of $US24 a share.

Berkshire now holds 998 million BofA shares worth $US25bn, making it Berkshire’s second-largest equity holding behind Apple.

Buffett’s decision to buy a weak stock is noteworthy when so many others are talking about hedging. In fact, it’s hard to recall a time when Buffett has not chosen to make major purchases when the market was weak.

Buffett’s actions reinforce the notion that it is arguably better to buy fear than to hedge fear. Aside from the expense of hedging, which can depress portfolio returns, hedgers have to be right on the timing. The more time packed into the hedge, the more expensive the hedge.

While it sounds catchy to describe the stockmarket as having become “antifragile” — able to withstand social and financial chaos — it’s truly difficult to have such confidence about something as diverse and complicated. Instead, it’s better to focus on stocks, which are more knowable.

In that spirit, let’s reconsider Bank of America, a company we have championed since the darkest days of the financial crisis, well before Buffett became its most famous shareholder.

When it seemed as if the bank might go under, we championed it and CEO Brian Moynihan, and encouraged investors to build positions when the stock was trading close to zero.

Now, after more than a decade, Bank of America is in a very different place, though the shares are again weak as the Federal Reserve once more reduces rates to support a wounded economy and financial system.

So far this year, Bank of America’s stock is down around 30 per cent. Over the past year, the stock is down about 18 per cent. During the past 52 weeks, the stock has ranged from $17.95 to $35.72.

Remember what Buffett does: He uses weakness to his long-term advantage.

This is an edited version of an article which first appeared in Barron’s.