Warren Buffett is widely recognized as the greatest investor in the world, based on a decades-long record of outperformance, but he's the first to acknowledge that he's merely mortal, with more than his share of mistakes. As of December 31, 2017, Berkshire Hathaway Inc. (BRK-A) held 45 stocks in its investment portfolio that trade on U.S. exchanges, according to SEC filings. While some of them have proved to be golden bets, not all of the Oracle's stock picks have been blockbusters. Some of the laggards have returns that may be good enough for some, but certainly not sufficient to keep up with Buffett's track record.
Out of those stocks, here are Berkshire's 10 biggest underperformers based on total return (dividends included) data for the 5 years through May 2, 2018, plus their 10-year total returns through the same date, as compiled by FactSet Data Systems Inc. and analyzed by MarketWatch.
1. Teva Pharmaceutical Industries Ltd. (TEVA):
The shares of the struggling pharmaceutical company have dropped 45% over the past five years and lost more than half their value (-52%) over the past decade. Berkshire Hathaway bought 18,875,721 shares in the company in the last quarter of 2017.
2. Sanofi ADR (SNY) :
Another pharma company causing pain to Berkshire Hathaway's portfolio. Sanofi's ADR has seen a five-year return of -20%, though the return for the ten year period is a generous 34%.
3. International Business Machines Corp. (IBM):
IBM was Buffett's rare technology bet and while the shares delivered a 48% return over a ten year period, the five year performance is an abysmal -18%. The Oracle of Omaha announced in 2018 that Berkshire Hathaway completely exited its IBM position.
Warren Buffett: InvestoTrivia Part 1
4. Procter & Gamble Co. (PG):
Back in 2005, Berkshire became a shareholder in PG when the latter acquired Gillette, of which Berkshire was a large shareholder. Over the past ten years, PG shares have generated a 45% return and over the past five years have returned 7%. Berkshire sold a large amount of PG shares in 2016 but continues to hold 315,400 shares as of December 2017.
5. DaVita Inc. (DVA):
A healthcare company specializing in renal care, DaVita has returned 8% over the past five years while the investment has given a 143% return over the past decade.
6. Verizon Communications Inc. (VZ):
The telecom and cable company has generated 14% in the five year time period while providing 114% return over the 10 year time horizon.
7. Coca-Cola Co. (KO):
Buffett is not just a loyal customer of the Coca Cola Company but a long time investor too having purchased shares in 1988. The beverage giant has yielded a 17% five year return and a 95% ten year return fo Berkshire Hathaway. The admitted junk food aficionado has said that he drinks Cherry Coke at home and regular Coke at work.
8. Mondelez International Inc. (MDLZ):
As of December 2017, Berkshire owns 578,000 in confectionery company Mondelez International. Buffet's investment in the maker of Oreo and Chips Ahoy! has resulted in a 31% five year return and a 135% ten year return.
9. General Motors Co. (GM):
The American auto giant has been through rough times over the past few years though it has delivered a 38% return over the five year period. (The company went public in 2010)
10. United Parcel Service Inc. (UPS):
The parcel delivery service has come under pressure recently on the threat from Amazon but as an investment for Berkshire Hathaway it has returned 50% over the past five years and 104% over the ten year time frame.
By comparison, the total return for the S&P 500 Index (SPX) has been 83.0% for the 5 years through May 2, 2018, and 131.2% for the 10 years through that same date, per Yahoo Finance. Thus, among the above list, Mondelez and DaVita have outperformed the market when viewed over 10 years.
Warren Buffett: InvestoTrivia Part 1
A Note on Methodology
Of Berkshire's total portfolio of 45 stocks, 27 were in the red with negative total returns year to date through May 2, 2018. However, since Buffett has a long investing horizon, looking at performance over the prior 5 years and 10 years seems more appropriate. Also, these do not include Berkshire's investments outside the U.S.
Of the 27 YTD losers, 20 have been held for at least 5 years by Berkshire, and 17 for at least 10 years. Among those stocks held for 5 years or more, 16 of the 20 have underperformed across 5 years. Among those stocks held for 10 years or more, 11 of the 17 have underperformed across the entire 10-year period.
Four Lessons From Buffett's Mistakes
Buffett is quick to admit his mistakes, and there are at least four big lessons that investors can draw from them, according to MarketWatch. These are: don't get swayed by emotion, don't underestimate customer loyalty, don't rely too much on numbers, and don't hesitate to cut losses.
After recognizing that his initial investment in Berkshire Hathaway, a failing textile company in New England, was a mistake, Buffett continued to buy shares. The reason? An executive who also was the top shareholder promised to buy Buffett's stake at one price, then tried to pay slightly less. In what he called "a monumentally stupid decision," in his 2014 letter to shareholders, Buffett continued to buy shares out of anger, and destroyed billions of dollars of value in the process.
The importance of customer loyalty was impressed on him at age 22, MarketWatch says, when he purchased a gas station with a friend, and found that nothing they did could win customers from an established station across the street. Another example of a Buffett investment based on the value of customer loyalty could be Coca-Cola.
As for reliance on numbers and quantitative criteria, Buffett has said, per MarketWatch, "the really big money tends to be made by investors who are right on qualitative decisions." That is, while Buffett generally relies on quantitative, fundamental analysis of a company's financials in making his investment decisions, he recognizes that the numbers have limitations, and successful investing cannot be reduced to formulas.
Regarding the cutting of losses, an instance that springs to mind is when Buffett became disenchanted with the management of U.K-based supermarket chain Tesco in 2013, but sold only part of Berkshire's position rather than liquidating it entirely. A year later, serious accounting problems came to light, the stock plunged, and Berkshire lost about $444 million after tax on its investment. If Buffett had been more decisive earlier, this could have been avoided.