The tale of the market has been one of volatility over the last six months. The FTSE 100 has seen four big dips during this period and the US market has been sliding steadily in 2022 prompting calls to ‘buy the dip’. While many see this as a chance to capitalise, Warren Buffett is holding on to his cash pile in search of more stable market conditions and businesses. So what’s his reasoning and why am I content to watch the market and do some research right now as well?
Berkshire Hathaway’s results and annual letter
Warren Buffett’s Berkshire Hathaway released its fourth-quarter (Q4) 2021 results recently. Surprisingly, its balance sheet showed a $147bn cash reserve. In fact, this is the second year in a row that Berkshire’s stock sales value was higher than stocks purchased. In 2021 alone, the company unloaded a net $7.4bn in shares.
Buffett reiterated in his annual letter that the team at Berkshire picks businesses and not simply stocks. This reiterates one of his popular principles of picking companies that offer long-term value rather than trading based on price fluctuations. And to me, market health is determined by its stability, which has been rare in recent months. Even though my watchlist of quality companies looks resilient, recent results should still be subject to intense scrutiny, according to Warren Buffett.
The Oracle of Omaha warned investors to be wary while reading financial reports and make sure that businesses are accounting for all factors. “Deceptive ‘adjustments’ to earnings – to use a polite description – have become both more frequent and more fanciful as stocks have risen. Speaking less politely, I would say that bull markets breed bloviated bull,” Buffett wrote.
Uncertain times
I think that over last two years investing has gained a lot of traction. And new investors get carried away by the promise of incredible returns. But I stand by the Foolish investing philosophy of looking at the long-term potential of a business and not investing based on trends.
Several promising sectors have hugely inflated valuations right now. For example, the gaming boom in 2020 brought in a lot of investors and UK gaming stocks grew immensely. But gaming shares have fallen steadily since mid-2021. Shares of UK giants like Frontier Developments are down over 45% in 12 months.
The same holds true for even the most tested businesses. Commodity prices have been fluctuating in the last six months and are set to worsen given recent disputes. The Bank of England increased its key interest rate this month to contain the fastest growing UK inflation in decades. This could have a trickle-down effect on sectors like housing and development. The electronic vehicle boom inflated the valuations of companies like NIO, Tesla and Rivian. But all three shares are down over 25% since 2022. Trusted performers like Rolls-Royce were forced to restructure and I think gauging the success of these efforts will take time.
Right now, picking solid businesses is no easy task, even for a genius like Warren Buffett. There are several variables that could affect the market, making it a tricky period. But I’m staying calm, and carefully observing and researching the shares on my watchlist. That’s my key action for today. I would consider an investment once market conditions stabilise in the coming months.