If you are going to do business prospecting long enough, you are going to be hit by duds. That is the nature of things. It is just that Warren Buffett is held to a higher standards.
UK’s Tesco, at the time of purchase was in a funk, and if you understand how Berkshire thinks, Tesco is the sort of old school business that you would think Buffett understands and it gives you confidence to follow Buffett and put your money in.
This case study probably shows while its important to have good confidence in people that appreciate business well, its better to have your own view on things when you are investing as well.
Mr Buffett bought Tesco shares in 2007 as it was riding high in the UK and planning expansion across the US. He spent $2.35bn amassing a 5.2 per cent stake at the peak of his enthusiasm for the company, including a final chunk after a January 2012 profit warning.
That warning, in retrospect a sign of trouble ahead, wiped £5bn off Tesco’s market capitalisation, but Mr Buffett spent about $800m taking his stake from just over 3 per cent to 5 per cent, in a widely followed sign of confidence in the company.
In a share sale last year Berkshire came out broadly neutral versus the purchase price, but by the end of 2013, according to the Berkshire Hathaway annual letter to shareholders, it still owned 301m Tesco shares, or 3.7 per cent of the company.
The letter said they were bought for $1.699bn and were worth $1.666bn at the end of last year. At the current share price, the 301m shares would be worth $880.5m, a paper loss of 48 per cent, and Berkshire had topped up its holdings modestly this year.
Tesco was the only stock among Mr Buffett’s biggest 15 holdings that posted a loss in 2013, the letter said.
The best time to buy value deals is often when they look ugly, but there are also many value pretenders that look ugly as well.