Edmond, OK
Monday, May 18, 2009
Warren Buffett has said his favorite holding period is forever. Does he follow his own advice?
Buffett's Berkshire Hathaway recently posted its worst quarterly loss in more than 20 years and a big chunk of that was due to what Buffett called a "major mistake" Less than a year ago, with oil prices nearing their all-time high, Buffett dramatically upped his stake in oil giant ConocoPhillips and became its largest shareholder. Unfortunately, his timing was horrible. ConocoPhillips stock subsequently plunged along with the price of oil and as of last Friday, the stock was down about 50% from its high of last summer, according to Yahoo! Finance.
So, here's your question: You're Warren Buffett, your favorite holding period is forever, and a stock you recently paid billions of dollars for is now down by billions of dollars in just a few months, what do you do?
Well, Mr. Buffett hit the sell button. In the first quarter of this year, he sold 13.7 million shares of ConocoPhillips and took a $1.9 billion loss, according to Bloomberg. But, that may not be the end of his losses. As of March 31, Berkshire still held 71.2 million shares.
There are two good investing lessons here.
First, if you make an investment and the facts change, don't be afraid to cut your losses and move on to a potentially more rewarding opportunity. Remember, you don't have to recover your loss in the same way that you generated your loss.
Second, taking a capital loss may offer some tax benefits. In Buffett's case, the $1.9 billion loss may allow Berkshire to recover as much as $690 million in previously paid capital gains, according to Berkshire's quarterly report. Tax benefits shouldn't be the only reason for selling an investment, but they can be part of the equation.
Oh, and by the way, Berkshire entered into long-term derivative contracts in recent years that are more than $13 billion in the hole as of March 31, 2009, according to Berkshire's quarterly report. These contracts have expiration dates between 2019 and 2028 so there is time for them to recover, but $13 billion is a big hole to climb out of.
Yes, even the greatest investors make mistakes. However, one thing that makes them great is their willingness to embrace change, cut their losses, and move on.
Best Regards,
Greg Womack, CFP
PLAN FOR LIFE. PLAN FOR WEALTH.
Buffett's Berkshire Hathaway recently posted its worst quarterly loss in more than 20 years and a big chunk of that was due to what Buffett called a "major mistake" Less than a year ago, with oil prices nearing their all-time high, Buffett dramatically upped his stake in oil giant ConocoPhillips and became its largest shareholder. Unfortunately, his timing was horrible. ConocoPhillips stock subsequently plunged along with the price of oil and as of last Friday, the stock was down about 50% from its high of last summer, according to Yahoo! Finance.
So, here's your question: You're Warren Buffett, your favorite holding period is forever, and a stock you recently paid billions of dollars for is now down by billions of dollars in just a few months, what do you do?
Well, Mr. Buffett hit the sell button. In the first quarter of this year, he sold 13.7 million shares of ConocoPhillips and took a $1.9 billion loss, according to Bloomberg. But, that may not be the end of his losses. As of March 31, Berkshire still held 71.2 million shares.
There are two good investing lessons here.
First, if you make an investment and the facts change, don't be afraid to cut your losses and move on to a potentially more rewarding opportunity. Remember, you don't have to recover your loss in the same way that you generated your loss.
Second, taking a capital loss may offer some tax benefits. In Buffett's case, the $1.9 billion loss may allow Berkshire to recover as much as $690 million in previously paid capital gains, according to Berkshire's quarterly report. Tax benefits shouldn't be the only reason for selling an investment, but they can be part of the equation.
Oh, and by the way, Berkshire entered into long-term derivative contracts in recent years that are more than $13 billion in the hole as of March 31, 2009, according to Berkshire's quarterly report. These contracts have expiration dates between 2019 and 2028 so there is time for them to recover, but $13 billion is a big hole to climb out of.
Yes, even the greatest investors make mistakes. However, one thing that makes them great is their willingness to embrace change, cut their losses, and move on.
Best Regards,
Greg Womack, CFP
PLAN FOR LIFE. PLAN FOR WEALTH.
Greg K. Womack, CFP
Womack Investment Advisers
Edmond, OK
405-340-1717
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A Weekend with Warren Buffett: And Other Shareholder Meeting Adventures by Randy Cepuch
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Related Links
Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Discuss this topic @ Shareinvestor.net.nz
Share Investor's Daily Forex Updates
Recommended Amazon Reading
A Weekend with Warren Buffett: And Other Shareholder Meeting Adventures by Randy Cepuch
Buy new: $23.47 / Used from: $0.01
Usually ships in 24 hours
Kindle 2/Kindle DX: Amazon's New Wireless Reading Devices (Latest Generation)
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