Warren Buffett has long been considered an icon on Wall Street. His decades of successful investing has resulted in a following unlike any other investor, but even Buffett has made mistakes in the past, and in some cases the recent past.
One of Buffett’s best attributes is that he only invests in companies that he understands, and he tries to make investments in companies that he will never have to sell. His value-investing approach has worked for him over the years, but even the best investor makes mistakes, and changing times make it ever more difficult to stay on top of the game.
Buffett has a strategy and he tends to stick to that strategy, but perhaps we are starting to see cracks in his system. Here are a few examples of mistakes that Buffett has made, and raises the question of whether or not he can still produce the types of returns that everyone has become so accustomed to seeing through the years.
Coca-Cola (KO) stock is facing a major problem with declining soda sales as consumer shift away from sugary soft drinks which are often pointed at as a root cause for the obesity problem in the U.S. The company has managed to partially offset the consumer shift with cost-cutting measures and an increased focus on its non-carbonated drinks such as water and tea. Buffett recently came out warning that the company should stay out of the rapidly expanding marijuana sector because it would hurt its “wholesome image”. Yes, Coca-Cola is one of, if not the, best recognized brand on the planet. People around the globe instantly identify with the red can, but it is hard to argue that sodas are “wholesome” considering the health debate over the long-term dangers of drinking too much soda.
Marijuana is a fast growing market, and it could be a huge new revenue stream for the company if it were to partner with a major player in the sector to develop cannabis infused drinks. Coke will eventually need a new, strong revenue stream, and with medical and recreational marijuana quickly spreading to new localities Coke could have a gold mine on its hand with the right partnership. I understand Buffett’s argument, but in this case I think he needs to step out of the box a little and see where the tide is headed.
Warren Buffett’s investment company, Berkshire Hathaway is known for value-investing. After years of avoiding an investment in technology titan Amazon.com (AMZN) Buffett recently announced that Berkshire had been buying stock in the company and it would show up in regulatory filings later in the month. Technology has never been considered one of Buffett’s focal points, so it is easy to overlook the Oracle not getting into the stock five or six years ago before the company skyrocketed to its current level but is Amazon a “value stock” at this point. Buffett thinks so. Perhaps Amazon is inexpensive at 80 times earnings, but the stock is undeniably priced for perfection and investors would be quick to drive shares lower on any sign of weakness.
Amazon is definitely the king of e-commerce, and the company has carved itself a leadership role in the fast-growing cloud-computing space, but everything has to go right for the company in order for the stock to maintain its current valuation and build on its recent gains. Perhaps this is an example of “better late than never”, or perhaps this is Berkshire’s attempt to catch up with the rest of the market, which is never a position a “value investor” wants to find themselves.
International Business Machines (IBM)
During his career, Buffett has not been forced to give up and wave the white flag on too many of his investments, but International Business Machines (IBM) is one case where the Oracle did have to admit defeat. Buffett often spoke of IBM as one of his smartest investments, but in early 2018 he called it a day and sold 94% his IBM shares after a seven-year investment period. Buffett jumped into IBM in 2011 despite his previous avoidance of tech stocks which he always stated were too hard to value. IBM had some great past achievements, but the company failed to keep pace as the market shifted, and its ambitions in AI and cloud computing fell short of the company’s and analysts’ expectations. Buffett cut his losses on IBM but took the pain of a bad decision on this stock.
Kraft Heinz (KHC)
Consumer goods maker Kraft Heinz (KHC) has performed miserably in recent years with Buffett being the company’s single-biggest shareholder. KHC stock has struggled in recent years and gapped sharply lower in late February after a big earnings miss on weaker than expected sales, and the company announced a $15 billion write-down on its Kraft and Oscar Mayer brands. The company recently announced it will have to restate its financial statements for 2016 and 2017 after a review revealed employee misconduct. Buffett’s stake in the troubled company is around $10.6 billion, and while he maintains his confidence in the company Wall Street does not share his opinion. Analysts do see upside with an average price target of $39.36 versus a current price of $32.38, but analysts will need to see the revised previous year financials before adjusting their targets.