The Secret Behind Warren Buffett's Success during Financial Crises

“Be fearful when others are greedy and to be greedy only when others are fearful.” This famous quote by billionaire and Berkshire Hathaway CEO Warren Buffett led him to become wealthy by making an opportunity out of crises, waiting for the stock market to collapse before buying.

Over the past year, 2024, Buffett sold $321 billion worth of stocks, a strange move when the market was booming. He kept cash instead of investing it. But now, his unexpected insight has come to light, as the stock market has crashed with massive losses.

"He doesn't purchase stocks just because they're on sale. That approach was his mentor Ben Graham’s style. Known as the “cigar butt” style of investing, this approach picks up discarded business cigar butts from the side of the road, selling them at deep discounts to book value with one good puff left in them," Investopedia wrote.

Market Collapse

President Donald Trump's announcement of tariffs on imports from several countries, and threats of retaliation from foreign countries, wiped up to $5 trillion—more than double Nvidia's market value—from the S&P 500 over the course of Thursday and Friday.

Some of Buffett's favorite stocks have been hit hard, with Apple, American Express, Bank of America, and Occidental Petroleum falling more than 15% in two days.

The economic downturn is likely to encourage the Berkshire Hathaway CEO, as he is a value investor who seeks to buy companies at a discount to their intrinsic value and is known for using crises, when he invested $26 billion in five deals between 2008 and 2009.

In his 2017 letter to shareholders, Buffett wrote that sharp sell-offs can create "extraordinary opportunities" for investors who heed author Rudyard Kipling's words: "Keep Your Head When Others Are Losing Theirs?." However, high valuations have left him unable to buy stocks, acquire companies, or even buy back shares in his own company in recent years.

Warren Buffett's Wealth Increase

Warren Buffett, 94, has sold stock worth a net $158 billion over the past two years, and Berkshire's cash balance has nearly tripled, from less than $110 billion in September 2022 to $321 billion by the end of 2024, more than the market cap of Coca-Cola.

Thanks to his immense wealth, Buffett appears well-positioned to take on the market and buy stocks at bargain prices. Wall Street has rewarded Buffett for hoarding cash, with Berkshire's stock up nearly 9% this year, outperforming the S&P 500's decline of about 14%.

By Thursday's close, the stock's surge had added $23 billion to Buffett's personal fortune, pushing him past Bernard Arnault of LVMH and Larry Ellison of Oracle.

However, the patient and disciplined investor may wait a little longer before embarking on a shopping spree.

"When prices fall, it certainly encourages Warren Buffett to buy, unless he sees new and lasting damage beyond the discount," financial expert Stephen Cheek told Business Insider.

Stocks may be cheaper than before, but Cheek said Buffett would likely need a much larger drop to make a significant purchase. He may be buying too much during the crash, and no one knows.

Steve Hanke, a professor of applied economics at Johns Hopkins University who has taught Buffett-style valuation to students for decades, said he's watching his next move with the utmost care and caution because it will tell us a lot about where he thinks the economy is headed.

"If Warren Buffett dives into the market and starts buying, it would indicate that he believes Trump's tariffs were nothing more than a minor economic annoyance that created great buying opportunities," Hanke added.

"If Buffett refrains, it would indicate that he remembers the Smoot-Hawley tariffs of March 1930, which broke the back of the stock market and helped tip the world into the Great Depression."

Hanke's initial guess is that Buffett's knowledge of economic history will lead him to "stay on the sidelines, at least for a while" until the scope of the economic situation becomes clearer. If the market continues to collapse, Buffett's moment to buy and increase his wealth may come.