Just now, a massive write-down, Buffett's "biggest investment failure," but the stock god is still the stock god

When the book value of an investment is "halved" over a few years, it usually signifies a complete failure—but when the protagonist is Warren Buffett, the story may need to be interpreted from a different angle.

On August 2nd (Saturday), Berkshire Hathaway, led by Warren Buffett, disclosed in a regulatory filing that it had made a massive $3.8 billion write-down on its investment in Kraft Heinz, reducing the book value of its investment to $8.4 billion, a significant drop from over $17 billion at the end of 2017.

This event confirms external judgments about the failure of this investment, but an analysis by the Financial Times points out that due to the favorable terms Buffett secured in the deal, he remains a winner even in this widely recognized "Waterloo."

"Rare Failure": An Investment Halved

For the 94-year-old Buffett, this write-down is undoubtedly a rare setback in his illustrious investment career. Berkshire explicitly stated in the filing that part of the reason for the write-down is the continued decline in the fair value of Kraft Heinz.

In 2015, Buffett was a key driver behind the merger of Kraft and Heinz. However, since the merger, the stock price of this packaged food giant has fallen by a cumulative 62%, while the S&P 500 index has risen by 202% during the same period. The stark contrast makes this investment particularly glaring.

Kyle Sanders, an analyst at Edward Jones, bluntly stated that this write-down "should have been done long ago," calling it "one of Warren's biggest mistakes in decades."

In recent months, Berkshire has begun to distance itself from Kraft Heinz. In May of this year, Kraft Heinz announced that Berkshire had relinquished its board seat in the company. Analyst Sanders believes that the relinquishment of the seat, combined with this write-down, "is providing more flexibility for a potential exit from this position in the future."

The Other Side of the Story: Why the Oracle Still Doesn't Lose?

Despite the poor investment performance, an analysis by the Financial Times reveals another side to the story: betting against Buffett is usually not a good idea.

According to calculations from the media's Lex column, Berkshire initially paid $4.3 billion for its stake in Heinz and added investments during the merger with Kraft, bringing its total investment in Kraft Heinz common stock to $9.8 billion. Today, its 27.4% stake is valued at approximately $8.8 billion.

On the surface, this seems like a loss, but the calculations must include dividends. The Lex column points out that over the years, Berkshire has received about $6.3 billion in cash dividends from this investment. Therefore, when considering the total (the $8.8 billion market value + $6.3 billion in dividends), Buffett's total return on this common stock investment still reaches nearly 60%.

Even more noteworthy is that Buffett initially purchased an additional $8 billion in Heinz preferred stock under more favorable terms. This preferred stock not only paid over $2 billion in dividends but was also fully redeemed three years later. This portion of the investment provided Buffett with a quick and robust profit

Buffett's Distinct Contrast with Other Shareholders

Buffett's "invincible status" stands out even more when compared to other shareholders.

According to calculations by the Financial Times, for those shareholders who held the original Kraft Foods stock since the merger in 2015, their situation can be described as "meager." Adding together their one-time cash payments, annual dividends, and the current market value of their Kraft Heinz stock, the total return over the past decade is only 8%. If they had chosen to invest in Unilever—whom Kraft Heinz attempted to acquire unsuccessfully in 2017—their funds could have nearly doubled.

All of this confirms the two lessons proposed by the report: First, merging two mediocre companies does not create an excellent company. Kraft Heinz is facing challenges as consumers shift towards healthier foods, and the company expects its revenue to shrink by 3% this year. Second, Buffett always manages to secure better deals for himself than others, which allows even his worst mistakes to yield relatively good results.

Risk Warning and Disclaimer

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