What you can learn from Warren Buffett’s $1 billion portfolio loss

Julie Brownlee, Fsp Invest, 24 Nov. 2014

Tags: warren buffett, warren buffett losses, investment strategy, value investing, economic moats, warren buffett lessons



Last month, investing great Warren Buffett saw nearly a $1 billion wiped off his portfolio in one day.

This just goes to show that even Buffett has bad days on the stock market, just like everyone else.

So what led to a one-day loss of that magnitude? And what can you learn from it?

Read on to find out…



Why Warren Buffett’s portfolio suffered


On 21 October, Warren Buffett’s holding in IBM fell nearly $1 billion. Buffett’s investment company, Berkshire Hathaway bought into IBM in 2011.

That is an astronomical amount of money. But taking into account the dividends and the purchase price of his shares, the share price fall put him back where he started.

Buffett also suffered a hit with his investment in Coke on the same day.


The trouble with economic moats


Buffett likes to invest in companies like large economic moats. He also likes to buy a stock and hold onto it forever.

The idea behind investing in companies like large economic moats is they have a huge market share that other companies just can’t compete with. This in turn gives healthy profit margins and great earnings growth.

The problem with focusing on economic moats is that it can work against you.

IBM is facing issues dealing with the influx of cloud computing from new competitors in the arena like Amazon. Amazon can easily provide this service to its customers.

It’s a similar story with Coke. With a downturn in people consuming sugary drinks, the brand is struggling with its association with its biggest product.


Buffett’s value investing roots


Buffett is a strong advocate of value investing. But as Berkshire Hathaway has grown in size over the years, this investment strategy is harder to follow.

He now has to focus on decent companies at reasonable prices, rather than potentially fantastic companies at bargain prices, John Stepek in Money Morning UK explains.

And with so many big industries changing as technology changes, this is a hard strategy to follow.

What Buffett’s bad day on the market shows is that all investors are vulnerable to losses. And sometimes, you have to revisit your strategy.

You need to take time to evaluate all the stocks in your portfolio and ask yourself…

  • Is the company still thriving in the current climate?
  • Is it going to work in the future?
  • Are the reasons you bought the share still valid?

If not, you might need to adopt some changes.

So there you have it, what you can learn from Warren Buffett’s $1 billion portfolio loss.

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