Warren Buffett is the most successful investor of our time. Still, he just suffered a multibillion-dollar loss on one of his high-profile investments.
What can we learn from this? Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of Kraft Heinz KHC, -2.06% Please note the following:
• The chart shows a big jump in the stock on the Heinz and Kraft merger. The market was excited about the involvement of Warren Buffett and his Berkshire Hathaway BRK.B, +0.25% in the deal.
• The chart shows that The Arora Report gave a signal to sell or short-sell Kraft Heinz on the news. We wrote: “Consumer tastes are changing and neither company is aligned with the new trend.”
• This short signal was one of the hardest we have given, for two reasons. First, who in their right mind would want to short what Buffett was buying? Second, now years later with the benefit of hindsight, it is clear that our statement about consumer tastes was prescient. However, at that time, the prevailing wisdom was that organic and healthy food was a niche business and it was not going to adversely impact brands such as Kraft and Heinz, both of which sell processed food.
• As the chart shows, it was a cost-cutting story for a long time.
• The chart shows Kraft Heinz attempted a global-brand grab by offering $143 billion for Unilever UN, -0.91% For those unfamiliar with Unilever, it is a global British-Dutch consumer-goods company on par with the more familiar name of Procter & Gamble PG, -0.72%
• The chart shows that the Unilever bid was quickly abandoned.
• As the cost cutting ran its course and was not providing any new benefits and Kraft Heinz could not find a major acquisition, it simply became a story of the “hope” strategy and Buffett’s halo.
• As the chart shows, during a period in which the Dow Jones Industrial Average DJIA, +0.31% S&P 500 ETF SPY, +0.22% and Nasdaq 100 ETF QQQ, +0.47% performed well, Kraft Heinz lost a big part of its value.
• The chart shows that, finally, the long-overdue admission from the company came and the stock fell.
• Investors who were not paying attention to the “change” were hit with a bombshell. The change is that consumers are no longer buying processed food and are opting for healthier foods.
• The chart shows the two biggest volume days — the first on Buffett’s buy and the second on the bombshell.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
A strategy that works
Buffett’s loss can help us understand a strategy. The strategy is to focus on change. In the case of Kraft, the change in consumer taste was happening. Buffett acknowledged Monday that he overpaid for Kraft.
Please click here to see five stages of a long trade based on change.
Please click here to see five stages of a short trade based on change.
Here are a handful of easy-to-understand examples of change:
• When Steve Jobs of Apple AAPL, +0.87% introduced the iPhone, it was a big change. How well would you have done by buying Apple stock and short-selling BlackBerry BB, +1.33% stock?
• When Facebook FB, +2.05% finally figured out mobile, how much money would you have made by buying Facebook stock?
• When Amazon AMZN, +0.21% expanded beyond books, that was a big change. How much money would you have made by buying Amazon stock?
• When Netflix NFLX, +0.31% switched from DVDs to streaming, that was a big change. How much money would you have made by buying Netflix stock?
• When AMD AMD, +1.83% changed its focus, how much money would you have made by buying AMD stock?
A change happening now
Many changes are happening right in front of your eyes. “Change” provides opportunities. One change I would like to highlight is that society’s attitude about marijuana is changing. There are seven marijuana stocks in The Arora Report marijuana portfolio. Four of the most popular marijuana stocks are Canopy Growth CGC, -1.68% Cronos CRON, -7.53% Aurora Cannabis ACB, +4.45% and Tilray TLRY, -2.01% Just because a stock is popular, that does not mean it is a buy. Please see “These three marijuana stocks are rising in popularity.”
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.