Why Warren Buffett Sold His Wal-Mart Stock And What He Thinks Of Amazon’s Jeff Bezos

Warren Buffett Wal-MartBusiness Insider/Andy Kiersz, data from Yahoo Finance

Why Warren Buffett Sold His Walmart Stock and What He Thinks of Amazon’s Jeff Bezos by John Szramiak was originally published on Vintage Value Investing

Last month in Berkshire Hathaway’s  SEC Form 13F filing, Warren Buffett revealed that in Q4 2016 he had sold $900 million worth of Wal-Mart stock – or 90% of the Wal-Mart stock Berkshire owned. This leaves Buffett and Berkshire Hathaway with about $100 million of Wal-Mart stock, down from $3 billion in the middle of 2016.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

So why did Warren Buffett choose to completely cash out of the largest retailer in the world?

Why Buffett Sold Out of Wal-Mart

The timing of Warren Buffett’s decision to exit his Wal-Mart investment – right after Trump’s election – raised the possibility that maybe the proposed border adjustment tax had something to do with it. But Buffett – who has warned that it’s a mistake to make investment decisions based on politics – said that the border adjustment tax wasn’t why.

The real reason Buffett decided to sell almost all of Berkshire’s Wal-Mart stock was that he thinks retailing is just too hard of a business to be in. And its a hard business to be in that’s been made even tougher by the rise of online shopping and Amazon.

Here’s Buffett talking about his sale of Wal-Mart in detail during his recent interview on CNBC’s Squawk Box:

“Wal-Mart’s a fabulous company. And what Sam Walton and his successors did, I mean, that’s one of the great stories of American business.

I think retailing is too tough for me. We bought a department store in 1966 and I got my head handed to me. I’ve been in various things in retail. I bought Tesco over in the U.K. and got my head handed to me. Retailing is very tough.

And I think the online thing is very hard to figure out, you know? Now, we’re sitting in a retailer [the Nebraska Furniture Mart, the largest home furnishing store in North America which Buffett bought in 1983] we own that does very well. I mean, I think this particular business is relatively immune from the online business, although we do a lot of online business here. But this does very well. I think it’ll continue to do well.

But I think that Amazon in particular is an entity that’s gonna have everybody in their sites. And they’ve got delighted customers. And it’s extraordinary what they’ve accomplished. And a lot of people the delivery, you know, and that is a tough, tough, tough, competitive force. Now, Wal-Mart’s pushing forward online themselves and they’ve got all kinds of strengths. But I just decided that I’d look for a little easier game.”

At last year’s Berkshire Hathaway Annual Shareholder’s Meeting, Buffett said that Amazon “is a big, big force and it has already disrupted plenty of people and it will disrupt more,” adding that many companies “have not figured the way to either participate in it, or to counter it.”

Wal-Mart's Headwinds… and the Rise of Amazon

Buffett first started investing in Wal-Mart 12 years ago in 2005. Wal-Mart’s stock has risen about 50% since then, which – when including dividends – translates into a 7% annual return. But recently Wal-Mart’s stock has faltered.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Although not as dramatic as the declines seen in other traditional retailers like Macy’s, Sears, JCPenney, and even Target, Wal-Mart has not been immune to the rise of e-commerce – and of Amazon. Since the end of 2014, Wal-Mart shares have fallen 21%, compared with a jump of 119% in Amazon.

In 2012, former Wal-Mart CEO Mike Duke said that his biggest regret as CEO was not investing more in e-commerce to better compete with Amazon.

“I wish we had moved faster. We’ve proven ourselves to be successful in many areas, and I simply wonder why we didn’t move more quickly. This is especially true for e-commerce. Right now we’re making tremendous progress, and the business is moving, but we should have moved faster to expand this area.”

While Walmart has invested billions in e-commerce since then, including its $3 billion acquisition of Jet.com, the company holds a tiny share of the online market compared with Amazon.

Wal-Mart's online sales were $14 billion in 2015, compared with Amazon’s $107 billion. That being said, Wal-Mart is still ahead in overall sales with $482 billion, more than four times as much as Amazon’s revenue.

What Buffett Thinks of Amazon's Jeff Bezos

Much of Amazon’s success in disrupting the entire retail industry can be attributed to its founder and CEO, Jeff Bezos. During Buffett’s recent interview on CNBC’s Squawk Box, Becky Quick said that a major investor had recently told her – off the record – that he or she had heard Buffett say that Amazon’s founder Jeff Bezos was “probably the best manager [Buffett’s] ever seen.”

Buffett confirmed this:

I think maybe he is, yeah. You know, I’ve said that. I mean it’s remarkable. Here’s a guy who gets in a car with his wife leaves Shaw and starts driving across and he thinks, ‘How am I gonna take over the world? Maybe I’ll sell books online.’ He is one terrific businessperson.”

So why doesn’t Buffett own shares of Amazon?

“Well, that’s a good question. But I don’t have a good answer. Obviously, I should’ve bought it long ago because I admired it long ago, but I didn’t understand the power of the model. And the price always seemed to more than reflect the power of the model at that time. So it’s one I missed big time.”

Becky Quick then asked if it’s too late for Buffett to buy Amazon stock because it’s already had its run:

"I just don’t know. Retailing is tough for me to figure out. I mean, if you go back to when I was a kid, in every town, the guy that owned the big department store was king, whether it was Marshall Field or Dayton or Hudson in Detroit or Frederick and Nelson in Seattle, or you name it – the department store was king.

And people said, “What can happen to it?” You know, it’s down there where the streetcar lines crossed and the women took the streetcar to shop there. And they could see 500 spools of thread and 500 wedding dresses. And they couldn’t see anything like that. It offered this incredible array of goods.

And then somebody came along with a shopping center. And instead of making it vertical with all this display owned by one person, they spread it out, owned by many.

And now comes the internet, and that’s the ultimate variety of things that you can get to very easily. So people love variety. They love low prices and a whole bunch of things. So it just keeps evolving. And the great department stores, many of ’em have disappeared and the rest are under pressure.”

One interesting fact about Warren Buffett and Jeff Bezos: Jeff Bezos owns the Washington Post, which he acquired in 2013. When Warren Buffett was a kid, he made more than $175 a month as a newspaper boy delivering Washington Post newspapers… that’s the equivalent of $2,360 per month today. And in 1973, Buffett began buying up the stock of The Washington Post company and soon become one of its largest investors and served on its Board of Directors. Through this investment he became good friends with Katherine Graham, who controlled The Washington Post Company and was the matriarch of the Graham family, who owned the newspaper from 1933 until they sold it to Bezos in 2013.



About the Author

VintageValueinvesting
Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…