Can Warren Buffett outclass Cathie Wood and the S&P 500 in 2022?

Nonagenarian Warren Buffett is commonly viewed as one of the most successful stock market traders of all time. As such, the internet is littered with his shiny pearls of wisdom.

‘If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.’

‘Our favourite holding period is forever.’

‘The stock market is a device for transferring money from the impatient to the patient.’

It’s safe to say that Buffett is a value investor. But while his Berkshire Hathaway shares have underperformed relative to competitors in recent years, value investing could make a comeback in 2022.

Warren Buffett vs Cathie Wood

Of course, there are other investing strategies. Cathie Wood’s flagship ARK Innovation Exchange Traded Fund (ETF) buys shares in disruptive technology companies which soared during the days of the covid-19 pandemic. Wood’s philosophy is to ‘focus on the future. Double-down on innovation.’

But while the fund’s top five holdings, Tesla, Teladoc, Roku, Zoom and Coinbase all exploded during the pandemic, they have also seen huge corrections in recent months. Top holding Tesla rose from $100 at the start of the pandemic to a high of $1,222 in November last year. But at $932 right now, it’s lost a quarter of its value in the space of a few weeks.

And at $483,900 per share, Berkshire Hathaway is up 34% over the past year and 97% in five years. Meanwhile, Cathie Wood’s ARK Innovation Fund is up 232% over the past five years, but down 50% in the past year. And according to the Financial Times, Wood is on course to be overtaken by Buffett.

Since the beginning of 2022, Berkshire Hathaway shares have risen by 7%, while the ARKK Innovation ETF has fallen 20% to $76 a share. And further movement away from growth stocks and towards value could be imminent. The US Consumer Prices Index inflation rate is now at an incredible 7.5%. Meanwhile, the Bank of America expects as many as seven interest rate rises this year. This rapidly rising cost of debt could see growth stocks valuations continue to plummet.

John Lynch of Comerica Wealth Management believes ‘gradually higher market interest rates (are) causing investors to reassess and to look at near-term profitability and the value and cyclical trade.’

King Lip at Baker Avenue Asset Management thinks ‘people are hitting the reset button…because valuations were pulled forward a lot…with rising rates, the valuations just can’t be justified.’ And Lisa Shalett at Morgan Stanley believes that ‘with the Fed pivoting on towards tightening, it is possible for rates to move higher with some persistence… the value-to-growth rotation we have been observing has some legs in 2022.'

Or index investing?

However, passive investing is not a binary choice between value and growth. Some prefer to invest in index trackers, with popular choices including the benchmark S&P 500, tech-heavy NASDAQ Composite and oil and bank-filled FTSE 100.

Over the past year, the S&P 500 is up 17%, while the Nasdaq Composite has risen a mere 4%. And both are experiencing unusually high volatility; the S&P 500 started 2022 at 4,797 points, fell to 4,327 by 27 January, and has now recovered to 4,587. And the Nasdaq Composite fell from 15,833 points at the start of the year to 13,353 on 27 January, before recovering to 14,490 points today.

With interest rates rising, the FTSE 100 may be a better index investing choice for 2022, having risen 3.5% to 7,647 points since the start of the year.

Wood currently believes that ‘innovation is on sale.’ And she has in the past noted that ‘corrections are good, they keep us all humble. The strongest bull markets I’ve been in are built on walls of worry.’ Buffett for his part has previously advised investors to ‘be greedy when others are fearful.’ Perhaps the two are more alike than at first appearance.

But as monetary policy tightens, Warren Buffett’s value approach could be the winner of 2022.

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*Based on revenue (published financial statements, 2022).