The most popular stocks in 2021 became pariahs in 2022. Here’s a short list of the top stocks at the start of the year and how they fared as November rolled around:
- Peloton -91.4%
- Affirm -88.5%
- Asana -87.5%
- Docusign -83.1%
- Snap -82.4%
- Doordash -81.7%
- Shopify -80.6%
- Coinbase -80.5%
- Okta -79.0%
- Twilio -78.8%
- Block -76.6%
As you can see, the carnage was vicious and the most popular retail stocks were eviscerated. Indeed, some of the most popular “trading gurus” were re-investing during the worst of the bear market, expecting every dip to be met with a quick bounce as it had been during the bull market. They couldn’t have been farther wrong. Every pop was met with more selling, and eventually it became clear that a bear market was in full force.
The easy conclusion to make is that buying stocks in a bear market is a loser’s bet. And the data seems to back up the claim. After all, the 20-year annualized return from 2001-2020 for the average investor was just 2.9% versus 7.5% for the S&P 500.
Dive a little deeper, however, and you can unearth from a billionaire a smarter way to “buy the dip” than chasing the most popular stocks.
Lesson #1 From Buffett
Instead of buying the stocks making headlines, Warren Buffett spent the last few years acquiring energy stocks like Chevron and Occidental Petroleum.
How did that work out for him?
Very well, as it turns out.
At the time of writing, the stock market (S&P 500) was down 20.46% for the year while the energy sector was up an astonishing 75.5%. No other sector came close to energy in terms of 2022 performance. Conglomerates were up just 1.28% Retail, Utilities, and Financials were all under water for the year.
In the most recent quarter, Buffett was buying stocks again. And while details are yet to emerge around the specifics of his purchases, you can bet they were not the high-flying growth stocks listed above that were favorites post-covid. Instead, Buffett was accumulating a larger holding in a company he is widely touted to be on the verge of buying outright, Occidental Petroleum.
He probably snapped up more shares of Berkshire Hathaway as part of Berkshire’s share buyback scheme, though we won’t know the finer details of precisely how much for a while yet.
The takeaway from Buffett’s actions is that to generate big returns you must acquire companies that are largely out of favor and get the investment thesis right. Some stocks that we discovered with high returns on capital, attractive free cash flow yields, and trading at discounts to fair value include:
- CF Industries
- Robert Half International
- Boise Cascade Company
- Skyline Champion Corporation
As you can see, none of these companies claim the glimmering spotlight of a financial news network debate but each has strong enough fundamentals to warrant further investigation and attention.
Lesson #2 From Buffett
Buffett can teach a lot about being “greedy when others are fearful” – he was a net buyer of stocks in the past quarter, snapping up $9 billion and selling $5 billion. But superior performance sometimes requires sitting still too.
And that brings us to lesson #2. Berkshire has a truly enormous cash position on its balance sheet. Currently, the company is sitting on $109 billion, about 3% higher than where it sat last quarter.
It’s true that Buffett has stated Berkshire will always have a large cash position to account for insurance liabilities but even with those covered, it’s clear that Buffett believes sitting with lots of cash right now is prudent. Or in other words, a better buying opportunity may appear on the horizon.
So if you were to combine the lessons from Buffett they would be: buy quality stocks that are out of favor, but just don’t buy them all at once; keep some dry powder on the side.