Berkshire Hathaway’s recent investments might surprise you.
If there’s a recession coming next year, somebody forgot to tell Warren Buffett.
You might have expected the Berkshire Hathaway (BRK.A -0.31%) (BRK.B -0.31%) CEO to be battening down the hatches, with the economy deteriorating as we head into 2023. Retail sales are falling, CEOs across a range of sectors are warning of macro headwinds, and the Federal Reserve expects to continue raising interest rates next year to bring inflation under control.
However, Berkshire’s latest investments don’t look like he’s afraid of a recession. Take a look below at the list of Berkshire’s stock purchases in the third quarter, the most recently reported period.
What you might notice about the list above is that all eight of those stocks are in cyclical industries. If you were trying to prepare your portfolio for a recession, you’d probably be buying safe stocks in sectors like consumer staples, healthcare, and utilities, instead of areas like energy or materials. Not only did Berkshire buy only cyclical stocks in the recent quarter, but some of those purchases were in especially cyclical sectors.
Oil prices, for example, tend to crash in a recession, making Occidental and Chevron vulnerable. Similarly, Louisiana-Pacific makes engineered wood products used in construction, but the homebuilding sector has gotten crushed in recent months. RH is a luxury retailer of home furnishings, and its CEO recently warned that the macro environment will worsen before it gets better.
A classic Buffett move
You might recognize this strategy if you’re familiar with Buffett’s philosophy. Rather than fleeing to safety, Berkshire seems to be getting greedy just as others are feeling fearful.
Buffett’s conglomerate isn’t buying these stocks because it thinks they will do well in a recession. It’s buying them because it thinks they are cheap and sees them as quality companies that are oversold. In other words, it’s preparing for the next bull market.
For example, RH has a solid track record of beating the market in the decade since its initial public offering and trades at a price-to-earnings ratio of less than 10. Louisiana-Pacific, the world’s largest manufacturer of oriented strand board (similar to plywood), trades at a P/E of less than 5, though earnings are expected to plunge next year as the housing market slows. Finally, investment banking firm Jefferies also trades at a P/E below 10.
What Buffett isn’t doing
Buffett isn’t trying to predict what the market will do next year. He once outlined his thinking on that subject: “Charlie (Munger) and I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good. If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do.”
Buffett believes he’s better off making sound investments for the long term rather than shifting his portfolio to defensive stocks to ride out a recession. And he makes a good point. While most economists expect a recession next year, debating the market’s direction is much more difficult; timing the market is generally a fool’s errand.
The stock market is a leading indicator, after all. It rebounds before the economy does, so it’s a mistake for investors to sit around on their hands, waiting for a recession to be declared before going out and buying stocks.
The best way to invest in 2023
Buffett’s lesson is clear for long-term investors: You’re better off using the bear market to buy quality companies trading at a discount, positioning yourself for the next bull market rather than a recession
That doesn’t mean there’s anything wrong with buying safe stocks. Still, many of them are trading at a premium right now, meaning you’re probably better off avoiding them unless you have a shorter time horizon, a low-risk tolerance, or need steady dividend income.
If you’re looking to take advantage of the sell-off, there are some gems in Berkshire’s recent purchases (like TSMC and RH), and some other Buffett stocks are on sale as well, like Amazon — which is as cheap as it’s been in eight years on a price-to-sales basis.
Stocks could continue to move lower in 2023, but as Buffett surely knows, that’s a good thing for net buyers of stocks because they benefit from lower entry prices. If you’re a long-term investor with some dry powder on hand, the bear market represents a unique opportunity to get some top names at a discount. It’s time to take advantage.
