Monthly Archives: October 2014

Buy and hold is NOT Fail Proof. Even Warren Buffett gets burnt – 13 Oct 2014

Posted on October 13th, 2014 in Stock picking, US stocks

Warren buy and hold is not fail safe

Mr Buffett is the 4th largest shareholder in Tesco. Tesco is a multinational grocery and general merchandise retailer headquartered in UK and is the second-largest retailer in the world (measured by revenues) after Walmart.

 

Sounds like a no-brainer investment, right.  A business in the business of providing necessities. Perhaps even recession proof, you might think.

 

Buffett bought into Tesco shares in 2006/2007, to amass a 5.2 per cent stake.  5 years later, when Tesco issued a profit warning in January 2012, (Its profits fell for the first time in two decades), Warren picked up some more.

 

Worst was to come.  Tesco’s share price eventually fell to a new 11-year low on 3 October 2014, closing at 172.15 pence, down from 487 pence at its peak in 2007. By then, Buffett was looking at about US$ 750m of unrealized losses.

 

The competitive landscape Tesco competes in had changed dramatically since Buffett bought into Tesco.  It had over-expanded, losing touch with its customers who in droves had moved over to discount rivals like Aldi and Lidl.

 

Finally, after holding Tesco shares for 7 years, Buffett admitted to CNBC, “I made a mistake on Tesco. That was a huge mistake by me.”

 

Things are going to get worse as Tesco is under UK’s financial regulator’s investigation after management admitted that it had overstated its 1H2014 profits by £250m.

 

Buffett’s mistake is all too common among investors who hold on to stocks of companies that have since lost their glory days and hope against hope that their battered share price will bounce up.  Buffett is going to trim his losses.  He too knows that this time, the leak is too severe to plug.

 

Buying and hold, hold, hold is not a “Fail-Proof” investment approach. You still need to adjust your position from time to time. Many promoters tell you stock picking is easy. Buy the stock of a “good” company and just hold. Don’t need to care too much. Tesco was a “good stock” when Buffet took a huge position in it. Look what happened. You have to know the correct approach to investment. Whoever tells you that investment is just buy and hold is not competent, lying or just don’t care enough about you to tell you the truth.

 

Our Best, Always

Empower Advisory Team

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