Novice investors like you and me have a bad habit of obsessing over our non-performing/ loss-making stocks. If the stock doesn’t notch up quick-fire gains, we worry that the stock may be a dud and deserves to be dumped. Our understanding of whether a stock is good or bad is dependent on how the stock price is reacting in the short-term.
At times like this, it is necessary to pay attention to what legends like Warren Buffett are doing with respect to their own non-performing stocks.
First, we have to take note of Warren Buffett’s performance as an investor. You will be astonished to note that in the past fifty years, Berkshire Hathaway’s market value per share has skyrocketed an eye-popping 18,26,163%. This translates to a CAGR of 21.6%. This means that if you had invested a paltry sum of Rs. 1 lakh in Berkshire Hathaway, it would be worth a mind-boggling Rs. 182.61 crore today.
Warren Buffett’s personal net worth is $62 billion today which is equivalent to Rs. 403,000 crore!
This fascinating fact is revealed by Paul R. La Monica of CNN in his piece “Warren Buffett’s top stocks are dogs this year”.
Paul R. La Monica also reveals the astonishing fact that despite Warren Buffett’s obviously superior investing skills, Berkshire Hathaway has lost 11% in 2015 and grossly under-performed the S&P.
Walmart, Berkshire’s eighth-largest holding, leads the rogues gallery of losers with a whopping loss of 30% this year. Walmart is the worst performing stock in the Dow and the future is looking grim for it given its sales and profit warning for next year.
Numbers 2 and 3 in the losers list are Procter & Gamble and American Express with losses of 18% and 17% respectively.
Warren’s other favourite stocks like IBM, Wells Fargo, Bancorp, Goldman Sachs, Coca-Cola, etc have also put up a poor show in 2015.
However, Paul R. La Monica is quick is to add that it is not all gloom for Warren Buffett. Instead, Warren has had his share of big winners as well.
Stocks like Kraft Heinz, Philips 66, Charter Communications, etc have bought some cheer to the beleaguered shareholders of Berkshire Hathaway.
Now, the important question is why Warren Buffett is hanging on to the losing stocks which Paul R. La Monica describes as “dogs”.
The answer is to be found in an old lecture that Warren Buffett gave to a group of students.
In this classic lecture, which is worth its weight in gold, Warren emphasized that if we buy a “wonderful business”, we can figure out “what” will happen though we can’t figure out “when” it will happen. His immortal words are:
“That factor so overrides anything else. If you’re right about the business, you’ll make a lot of money … the timing part of it is a very tricky thing. I don’t worry about any given event if I have a wonderful business … With a wonderful business, you can figure out what will happen, you cannot figure out when it will happen. You don’t want to focus too much on “when”, you want to focus on “what”. If you’re right about “what”, you don’t have to worry about “when” very much”.
Nobody can dispute that each of the losing stocks in Warren Buffett’s portfolio is a “wonderful business” in its own right and that they will have their day in the sun, sooner or later.
So, the next time you feel upset at the underperforming “dogs” in your portfolio, check whether the business is “wonderful” or not. If it is, then grit your teeth and prepare to wait patiently. You will be handsomely rewarded!