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Last week I wrote that this was the end of the Warren Buffett era as Berkshire BRK.A, -0.48% BRK.B, -0.37% underperformed the S&P 500 SPX, -0.47% over the entire 2009-2020 bear market. Even Buffett himself recommends investors buy the S&P.
Many Buffett fans responded by saying don’t count Buffett out yet because when (not if) the market tanks again, he’ll have more than $130 billion in cash to scoop up bargains. My MarketWatch colleague Mark Hulbert noted that top advisers often come back from losing streaks to post big gains.
So, what have the nearly 90-year-old Buffett and his 96-year-old business partner Charlie Munger done for us lately? Based on Berkshire’s SEC filings, three of Buffett’s biggest recent investments—Kraft Heinz KHC, -1.90% , Occidental Petroleum OXY, -3.76% , and airline stocks—have lost at least $7 billion altogether out of an investment of roughly $10 billion in each.
To my knowledge, this is the first time anyone has reported that figure. (Berkshire did not respond to my emailed questions by deadline.)
Heinz debacle
In 2013 Berkshire and private equity firm 3G Capital paid $23.2 billion to buy H.J. Heinz Co., and two years later Heinz bought Kraft Foods Group for $54 billion. Kraft Heinz Co. stock moved closely with the S&P for a couple of years. Then, after hitting an all-time closing high above $93 in February 2017, it began a long decline.
Last year Berkshire wrote down its investment by $3 billion, while Kraft Heinz took a $15 billion write-off on its Kraft and Oscar Mayer brands. In February, even before the market selloff began, Fitch Ratings and S&P Global Ratings downgraded Kraft Heinz to junk status. Meanwhile, in 2018 and 2019, 3G sold millions of shares (it still has a big stake) as Berkshire held firm. As of March 31, Berkshire’s Kraft Heinz shares were worth about $8 billion, around $2 billion less than what it paid for them.
When the deal was struck, The New York Times called it “a big bet on conventional staples of the American cupboard, even as consumers are shifting away from processed foods.” So, millennials just aren’t in to the iconic brands Buffett enjoyed as a boy.
“I made a mistake in the Kraft purchase in terms of paying too much,” Buffett told CNBC last June. No kidding.
Occidental Petroleum
Just two months later, in August, Berkshire completed a $10 billion investment in Occidental Petroleum, which helped Oxy win a bidding war against oil giant Chevron CHV, +0.50% to buy Anadarko Petroleum for $38 billion. The deal made Occidental the biggest player in the U.S.’s Permian Basin, the world’s highest producing oilfield.
Berkshire got 100,000 preferred shares, which gave it first dibs on dividend payments if things went south. That’s exactly what happened less than six months later. After the recent collapse in crude, Occidental cut dividends on its common stock by 86%. But it still owes Berkshire a hefty 8% annual dividend on the preferred shares, which Occidental has paid out in depreciated common stock rather than cash.
On Wednesday, Occidental common shares changed hands below 15, about one third the $44 a share at which it traded when the deal closed. As of March 31, Berkshire had lost about $500 million on the common stock it owned, but the April dividend payment doubled Berkshire’s common share holdings, cutting its paper loss in half.
We couldn’t determine a current price for the preferred shares of Occidental, which don’t trade regularly. The accumulation of those preferred dividends over time, whether in cash or common stock, could soften the blow of an investment that at best looks like a masterpiece of bad timing.
Not one, not two, not three, but four
And then there were the airlines. From mid-2016 through early 2017, Berkshire bought tens of millions of shares in the four largest U.S.-based carriers—American Airlines Group AAL, +0.96% , Delta Air Lines DAL, +2.42% , Southwest Airlines LUV, +2.02% , and United Airlines UAL, +4.03%
The price tag was north of $9.3 billion, by my calculations.
But when coronavirus hit, airline stocks plummeted, and by the time Berkshire dumped them all in April, they were worth about $4.3 billion, assuming all shares were sold on the SEC filing dates. That amounts to a stratospheric loss of $5 billion. Add all these losses together and you have at least a $7 billion hit to Berkshire, not including any decline in value on the Oxy preferred shares it owns.
Buffett has had some bad luck. Who could have foreseen COVID-19? But the problems with Occidental happened soon after the deal closed and there have been big clouds hanging over energy stocks for years. Buffett also waited until April to dump airline stocks, near the bottom.
Even more troubling, after he bought a stake in USAir in 1989, he complained the investment had “soured before the ink dried on the check.”
“Investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth,” he wrote to shareholders in 1992.
As recently as 2007, he noted that “a durable competitive advantage [in the airline industry] has proven elusive ever since the days of the Wright brothers.” Even in 2013, he called airlines “a death trap for investors.”
So, he didn’t heed his own warnings, then went out and bought not one airline, but four? After all these mishaps and losses, who would want to bet a single share of Berkshire Hathaway stock that Warren Buffett is going to return to his former glory?
