3 Buffett Investments Going South

If you judge Berkshire Hathaway, Warren Buffett’s company, by share price alone, you can tell that they are having a fantastic year in 2014.

At this time, Berkshire Hathaway shares are up 17.7% year to date, well ahead of the rise in the S&P 500 at 7.95%. Berkshire Hathaway’s even outperforming US small-cap stocks.

But when examining the company closer, you’ll hear some unsettling things coming from the investment engine created by Warren Buffett. The Oracle of Omaha has already suffered several billion dollars worth of paper losses this year alone.

The tried-and-true investment strategy that Warren Buffett employs is very simple to understand, but it is not nearly as easy to implement: buy excellent companies (either private or public) with a competitive advantage over the long-term that sells at reasonable prices.

Every Buffett investment also has a wide moat that rivals will have a difficult time crossing: a market position that is nearly unassailable, profit margins that are sustainable and superior earnings growth as well as returns on capital invested.

3 Recent Stumbles for Berkshire Hathaway

Just recently, three of Buffett’s high-profile stocks have fallen on hard times. Each of these stumbles has their own specific explanations. But they also share an overarching theme when looked at together.

The moats protecting these businesses are no longer as wide as they were in the past. More importantly to note, the competition is not even trying to cross their moats any longer. They are inventing a new way of doing business completely different from the other companies.

Certainly not a full-blown trend, but if too many more of these stumbles take place in the future, this could look to be a major problem for Berkshire Hathaway as it heads into the future.

Tesco

Known as the Walmart of the UK, Buffett’s Tesco investment has dropped by more than 50% this last year. So far, this has cost Berkshire Hathaway around $700 million. Earlier in October, Buffett admitted that he made a error publicly and said that his Tesco investment was a “huge mistake” while the company was also caught up in an accounting scandal at the same time.

The network of suburban supermarkets at Tesco has always been a huge barrier to entry for the competition. Until recently, when consumers decided to stop shopping there. Many UK shoppers are now strictly ordering groceries online, and for smaller purchases they use local convenience stores. Suddenly, the big moat at Tesco has now become a huge legacy asset. To the credit of Warren Buffett, Berkshire Hathaway is reducing its stake in the company now that it is trading near its 11 year low.

IBM

Buffett often talks about how he does not really understand, and he would never invest in, technology companies. But in 2011, he broke his own rule and invested in International Business Machines Corporation. At this time, he might be kicking himself for making this choice.

IBM used to make a lot of money selling hardware. But today, companies are shifting to cloud computing instead of buying stand-alone systems sold by companies like IBM. This has forced the hardware giant to create a fundamental shift in its overall business model. As confirmed by 10 consecutive quarters of falling sales, it’s not easy to pull off this change. Adding insult to injury, the hardware company had to pay a rival chip making company $1.5 billion to take its business off of its hands.

With IBM’s stock down 16.94% over the last six months, Berkshire Hathaway has suffered a loss of over $2 billion in 2014 on its overall investment in the company.

Coca-Cola

It was 1988 when Warren Buffett first invested in The Coca-Cola Company, and in many ways this is the flagship Warren Buffett stock. Yet Coca-Cola is currently facing unprecedented challenges in the market. Global sales volumes are currently stagnant, growing just 1% year-over-year. The company’s revenue is flat. Profit margins are dropping. In the third quarter alone, EPS has dropped by 13%, being hit hard by movements in currency.

Coke may have been the caffeinated sugar beverage of choice in the past. But if you take a trip to your local 7-11, the cola giant has a lot more competition than it did even just 10 years ago. Even if Coke continues to make the best-selling cola beverage in the world, consumers aren’t buying it as much since they are overwhelmed by so many beverages to choose from.

Does Moat Still Make a Difference?

With the paper losses that Berkshire Hathaway has suffered on these investments adding up to more than 1% of its market, Buffett is hardly suffering any major negative consequences.

But some of these stumbles recently are showing that Buffett’s “buy-and-hold forever” investment philosophy might not hold up as well as it once did.

Certainly the moats of the companies could still be there. But it doesn’t really matter if nobody wants to buy their stuff. More importantly, with the case of Tesco, your moat could certainly end up becoming your largest handicap.

Many of today’s traditional industries are experiencing massive disruptions. Sectors including taxi services, oil production and more are seeing long established business models changing practically overnight.

And these disruptions are making moats irrelevant in the long established situations.

There was a joke in the 1980s by money managers that said “you’ll never get fired for buying IBM.”

In today’s investment world, you may very well get fired for making that choice.

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