Back in the first half of 2020, an interesting position appeared in the 13F portfolio of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). The conglomerate had acquired a substantial stake in U.S. telecommunications giant Verizon Communications (VZ, Financial).
We know this position is likely to have been instituted by Warren Buffett (Trades, Portfolio) because it eventually became a top five holding in the portfolio towards the end of the year. The Oracle of Omaha has previously said that any position worth over $1 billion in value has to get his agreement before being acquired.
However, two quarters after this company achieved a top five position in the portfolio, the Oracle of Omaha seemed to change his opinion on the business. He started selling in the third and fourth quarters of 2021 and had exited the position entirely by the beginning of 2022.
This is quite an unusual scenario because Buffett rarely builds such a big position in a company to then change course and sell it only a few months later.
What was even more interesting about this trade is the fact that the billionaire has previously remarked that he is not interested in owning telecommunications companies because he believes they can be pretty terrible investments.
He has also commented on how difficult it is to predict growth rates for telecommunications stocks, considering the competitive nature of the industry and the continual requirement for additional capital spending:
“If you take — pull out a name, BellSouth, Verizon, I have no idea how that all comes together five or 10 years from now. I mean, I know people are going to be chewing Wrigley’s chewing gum or eating Hershey bars or Snickers bars five, or 10, or 15, or 20 years from now. They’re going to be using Gillette blades, they’ll be drinking Coca-Cola (KO, Financial), you know. And I have some idea what the profitability of each one of those will be over time and all of that. I don’t have any idea how telecommunications shakes out. And I wouldn’t believe anybody in the business that told me they knew because, you know, what would they have been telling me five years ago?”
We don’t know why Buffett decided to buy Verizon and then sell it so quickly, but if I were to hazard a guess, I would say that he realized he made a mistake and decided to reverse the mistake as fast as possible. His previous comments on why he sells stocks supports this thesis, though it is also possible he had a different reason for selling.
It is worth keeping this case study in mind in the current environment. The economic environment is changing very quickly and it will impact different companies in different ways over the coming months and years.
If the situation has changed, there is no shame in changing one’s view on a business, especially if you no longer understand the business. As Buffett once said:
“So, it’s just a game I don’t understand. That isn’t — there’s all kinds of things I don’t understand. I don’t know what cocoa beans are going to do next year. You know? I mean, it’d be a lot easier if I did. I could just make all my money on cocoa beans and be much simpler than trying to run a whole bunch of businesses out of Berkshire. But there’s — I don’t worry about what I don’t know. I worry about being sure about what I do know. And telecommunications doesn’t fall within that group.”
Sometimes, you only get to know a company inside out when you have a financial incentive to do the work. In this case, it’s best not to let emotions take over and influence the trade.