Warren Buffett, the billionaire investor and CEO of Berkshire Hathaway (BRK.A, BRK.B) is often lauded for his investment triumphs -- and rightfully so. Buffett's successes have far outpaced his failures. That being said, Buffett gets little credit for what may be more important: knowing when to cut your losses and walk away.
As an investor, Buffett is keenly emotionless and he should get a lot of credit for that. A recent case in point occurred last week, when Berkshire Hathaway announced it had reduced its stake in British retailer Tesco (TESO). Last year, Berkshire owned more than 400 million shares for a stake that was worth well more than a billion dollars. Buffett sold a big chunk last year but still held on to approximately 300 million shares.
Tesco shares have been crushed this year and they are down more than 50% in the past 52 weeks. The decline has represented a significant loss for Berkshire. Last month, Buffett called the Tesco investment a "huge mistake." And last week, a stock filed showed that Berkshire unloaded another big chunk of the investment.
What's interesting about the sale is one could argue that since the shares are down by more than 50%, now is the time for a value investor such as Buffett to buy more of Tesco, not to sell it. After all, Buffett clearly understands Tesco's business and presumably invested based on the company's long-term fundamentals. But with the shares down 50%, Buffett chose not to follow his advice of being "greedy when others are fearful."
I can think of a couple of reasons for the sale. First, it allows Berkshire to pick up some capital losses that it may choose to offset as capital gains elsewhere. While I doubt that was Buffett's primary reason, it is not an insignificant one. Second, and more likely, is that Buffett decided that Tesco's fundamentals were no longer as strong as previously though. For example, there is the legitimate competition from grocers such as Aldi that provide similar products for significantly less. The accounting issues currently surrounding Tesco may have also turned Buffett off.
Regardless of the primary reason, Berkshire appears to be getting rid of Tesco at a significant loss. The key lesson here is that when an investment thesis doesn't play out, cut your losses and move on. If the world's greatest investor -- who has enough capital to ride Tesco for years without ever being short of cash -- can do it, then it's clearly a lesson that many more investors should take very close to heart. Conversely, even in today's frothy market where investors are sitting on some tidy gains, cashing in some chips may not be foolish either.