You've made the money, but what do you do with it now?
The lessons from Warren Buffet’s decline
On Wednesday, our editor, John Stepek, had a look at Warren Buffet’s bad week. On Tuesday, “he lost nearly $1bn (on paper) from the value of his holding in IBM”. Even worse, “another of his favourite stocks – Coke – disappointed too”.
The short-term reason for IBM’s fall has been that “revenues fell for the ninth quarter in a row” and “IBM also had to pay a chipmaker $1.5bn to take its chip-making business off its hands”. However, the longer-term problem is that “IBM made its money selling hardware”. Since that model has been hit by cloud computing IBM has "been trying to shift focus onto software and services”. The problem is that, “it’s not easy to go from being dominant in one field to then changing your entire operation for another”.
This highlights a wider issue with Buffet’s strategy of buying companies with “a nearly invulnerable market share position, sustainable profit margins and returns on invested capital, and superior earnings growth.” The fact is that, “eventually your moat can become your biggest handicap”. Worse they could end up holding you back “because you have a great big pile of ‘legacy’ assets that are swallowing up resources you could be using for something else”.
Of course, ”Buffett is an incredibly good investor”. John also “fundamentally agrees” with Buffet’s value investing approach. Sadly, “Berkshire’s sheer size – as Buffett himself has pointed out – means that now he has to hunt for decent companies at reasonable prices, rather than potentially fantastic companies at bargain prices”. Since “lots of big industries face serious risk of disruption”, John thinks that this is “not necessarily as safe a strategy as it might look”.
John also has other concerns, such as “the unquestionable issue of succession management risk”. As a result, he “can’t say I’d be desperately excited about the idea of buying Berkshire Hathaway right now”. The good news is that “at our last Roundtable, one of our experts dug up a stock that he reckons is a bit like buying into Berkshire Hathaway back in the 1970s”. To find out what it is, subscribe to the magazine and get four issues free.
Tesco has further to fall
Tesco shares have been hit by falling profits and recent revelations about poor accounting. However, Phil Oakley thinks that they have further to fall.
• Tesco has further to fall
Do pensions policies get more short-termist than this?
The new pension reforms may encourage some people to cash in their final salary pensions. That would be a big mistake, says Bengt Saelensminde.
• Do pensions policies get more short-termist than this?
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