At the end of my post “On Billionaires, Their Buys, and Buffett“, I said “I will follow up with another post on this topic tomorrow. Hopefully, I can give you some idea of what you should and shouldn’t do based on news of Berkshire’s activities in specific stocks.”
This is that post. Unfortunately, before sitting down to write this post, a piece by James Altucher (author of “Trade Like Warren Buffett“) was brought to my attention. I’ll link through Value Investing News, because you should be visiting that site regularly – here’s Altucher’s article.
It’s good. However, there are still some things left for me to cover.
Altucher is right in stressing that Berkshire holds many positions that aren’t presently of interest, because the business has changed (or more usually) the stock price has changed. A rare example of the former is the Washington Post Company (WPO). If you want some idea of what the Washington Post (the stock and the business) looked like back when Buffett bought it, see Max Olson’s excellent article “Warren Buffett and the Washington Post“.
The Washington Post is a rare example of a Berkshire position that is no longer attractive because of changes in the business. In most cases, it’s a change in the stock price that disqualifies a Berkshire position from inclusion in your own portfolio. Several years ago, it was painfully obvious that Coca-Cola (KO) was one such stock.
During the Millennium Bubble, shares of Coke were priced for pluperfection. Buffett didn’t sell because he intends Coke to be a permanent holding for Berkshire. If he had been running his partnership, he would have sold. He has a different attitude at Berkshire – one he has made clear to shareholders countless times. As a result, he sometimes sacrifices better returns for Berkshire by sticking with a permanent position he knows is overpriced. Coke is probably the biggest and best known example of Buffett holding a stock he knew Berkshire would be better off selling.
But He Sells Too
However, Berkshire has many lesser known positions that it’s held for a long time. That sometimes leads people to believe that Berkshire never sells. Not true. Berkshire does sell; in fact, it has even gone as far as completely eliminating some large positions.
One recent example of such selling is H&R; Block (HRB). The company, which Berkshire once owned more than 8% of, became badly distracted with operations outside of its core tax preparation franchise. It seems clear Berkshire has eliminated its stake in H&R; Block. The company’s single minded pursuit of diversification and cross-selling is probably what turned Buffett off the stock – since Buffett bought in 2001, management has done a remarkable job of shrinking the company’s moat and scattering its eggs across many different, less secure baskets.
So, how can you avoid having a bad experience in a Berkshire stock? Don’t overpay. Even in some situations where Berkshire has …Read more