It’s not often that Warren Buffett makes a big mistake, but when he does he’s honest about it — and he has now described his decision to buy into Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) as a “huge mistake“.
The man dubbed the ‘Sage of Omaha’ was a man of few words this time, saying little more than “I made a mistake on Tesco. That was a huge mistake by me” to CNBC yesterday, but there’s a big story behind those two short sentences.
Be greedy!
Buffett first entered the Tesco fray back in 2007 though his Berkshire Hathaway investment firm, and went in heavier in 2012 after the UK’s biggest listed supermarket issued its first profit warning and the shares crashed by 16%.
“Be fearful when others are greedy and greedy when others are fearful” is one of the great man’s maxims and he lived up to it, taking his holding over 5%.
By the end of last year, Buffett’s stake of Tesco had dropped to 3.7%, but it was still worth around $1.7bn — and in the past year alone, his investment has lost around $750m (or £465m) as the share price has slumped 50% to 175p (losing a further 2% today).
But here’s the big question: after a string of profit warnings, the launch of an investigation into the overstating of profits by £250m, and a halving of the share price — what do we do now?
Maximum fear?
With the share price back to levels last seen in 2003, there’s a major risk of selling out at the very bottom if you dump Tesco now, and there would be few examples of buying high and selling low to match it. But if you hold and there’s more bad news, you could end up losing still more.
On the other hand, what about that old “fearful/greedy” mantra? Surely the fear has escalated enormously since Buffett bought in, and it’s a time to be even greedier now and fill our boots with cheap Tesco shares?
Well, averaging down is usually only a good idea if nothing significant has changed since you first invested — and plenty has changed at Tesco.
New boss to the rescue
So the real question is whether, with the arrival of new boss Dave Lewis, we really are at bottom for Tesco. With the shares on forward P/E ratings of under 10 for the next two year-ends, even with two years of EPS falls forecast, I see a good deal less downside risk now — although I have said that once or twice before.
For the Fool’s Beginners’ Portfolio, at least, I’m still holding.