Most investors consider Warren Buffett (Trades, Portfolio) to be the ultimate buy and forget investor with an ultra long-term holding period, especially for his larger positions. So for many, it came as a surprise when Buffett revealed he had begun to sell down his position in International Business Machines Corp. IBM during the first quarter.
Buffett’s decision to sell is a huge blow to IBM and its management as it seems even the largest shareholder of the business has no confidence in management’s ability to return the company to growth.
Buffett’s decision to sell serves as a lesson to investors that it is acceptable to turn your back on a losing position when your initial investment thesis no longer applies. Even though many believe Buffett brought IBM to hold forever, in Berkshire Hathaway’s BRK.A BRK.B 2016 annual report he actually says this way of thinking is not actually appropriate as he is willing to sell a position if it no longer meets his stringent requirements:
“Sometimes the comments of shareholders or media imply that we will own certain stocks 'forever.' It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever. Confusion about this point may have resulted from a too-casual reading of Economic Principle 11 on pages 110 - 111, which has been included in our annual reports since 1983. That principle covers controlled businesses, not marketable securities. This year I’ve added a final sentence to no. 11 to ensure that our owners understand that we regard any marketable security as available for sale, however unlikely such a sale now seems.”Â
This statement now seems like a thinly veiled revelation that Buffett was gearing up to sell IBM. Still, rather than concentrating on the past, what are the takeaways from this episode?
Key takeaway
For a start, the first takeaway should be it is not always best to blindly follow Buffett into a position without first conducting your own research. As I covered earlier this week, Buffett has an unrivaled insight into IBM and how companies across the Berkshire empire use the company, which was likely instrumental in his decision to initiate a position in the first place.
This is an insight almost no other investor has (even hedge fund managers and institutional investors). Buffett’s position was unique in this respect. It is clear something very substantial happened in the past six months to make Buffett change his mind on IBM, although it is not clear what this catalyst was. Without understanding IBM’s key competitive advantage over its peers, it would have been difficult to stand by the business over the past few years as sales steadily collapsed.
If even the world’s most patient investor cannot hang around long enough to wait for a turnaround, it seems far-fetched to believe IBM will ever be able to turn around its sales decline.
Nonetheless, if you bought IBM based on your own research and think another investment scenario is going to play out for the company, Buffett's involvement would never have been key to the thesis. If this is the case, his decision to sell will not be an issue. If you are now stuck with losses because Buffett's selling has sent IBM stock down further, however, it should act as a warning that it is never sensible to follow an investor into a position without first doing your own research.
Disclosure: The author owns no stock mentioned.
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