Just Recently, a Massive Write-Down, Warren Buffett's "Largest Investment Failure," But He's Still the Guru

When an investment's book value is cut in half within a few years, it usually means complete failure—but when the protagonist is Warren Buffett, the story may need to be interpreted from a different angle.

On August 2 (Saturday), Berkshire Hathaway, led by Warren Buffett, disclosed in regulatory filings that it had written down its investment in Kraft Heinz (Kraft Heinz) by $38 billion, reducing the book value of its investment to $84 billion, a significant decrease from over $170 billion at the end of 2017.

This event has vindicated the outside judgment on this investment failure, but an analysis by Britain's Financial Times points out that due to the favorable terms Buffett secured in the transaction, he is still a winner even in this recognized "Waterloo."

A Rare Failure: A Portion of an Investment Cut in Half

For Buffett, who is now 94 years old, this write-down is undoubtedly one of his rare heavy setbacks. Berkshire Hathaway has made it clear that part of the reason for this write-down is the continued decline in Kraft Heinz's fair value.

In 2015, Buffett played a key role as a pusher to merge Kraft and Heinz. However, since the merger, the stock price of this packaged food giant has fallen by 62%, while the S&P 500 index has risen by 202%. The huge disparity makes this investment seem all the more striking.

Edward Jones analyst Kyle Sanders flatly states that this write-down "should have been done earlier" and calls it one of Buffett's greatest mistakes in recent decades.

In recent months, Berkshire Hathaway has begun to distance itself from Kraft Heinz. In May, Kraft Heinz announced that Berkshire Hathaway had given up its seat on the company's board. Analyst Sanders believes that giving up the seat and this write-down "are providing more flexibility for future possible exit."

The Other Side of the Story: Why the Guru is Still Not Losing?

Although the investment performance was poor, an analysis by Britain's Financial Times reveals another side to the story: betting against Buffett is usually not a good bet.

According to that media's Lex column, Berkshire Hathaway initially paid $43 billion for Heinz shares and added more investments during the merger period, making its total investment in Kraft Heinz common stock valued at $98 billion. Today, its holding of 27.4% of the company's shares is valued at approximately $88 billion.

From a book value perspective, it seems to be a loss, but calculations must include dividends. The Lex column points out that Berkshire Hathaway has received approximately $63 billion in cash dividend payments from this investment over the years. Therefore, comprehensive calculations (including $88 billion in share value and $63 billion in dividends) indicate that Buffett's total return on this common stock investment is still around 60%.

What's more noteworthy is that Buffett initially acquired Kraft Heinz preferred shares worth $80 billion at a much better price. This preferred share not only paid over $20 billion in dividends but was also fully redeemed three years later, generating a rapid and stable massive profit for Buffett.

Buffett's Fresh Contrast with Other Shareholders

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

According to the Financial Times, for those who held shares in Kraft Foods from the time of the merger in 2015, their situation is indeed "meager." The total return rate over the past decade is only 8%. If they had chosen to invest in Unilever (Kraft Heinz's failed acquisition target in 2017), their funds would have almost doubled.

This is all confirmation of the two lessons presented in this report: first, two mediocre companies merging cannot produce an excellent company. Kraft Heinz is currently facing challenges from consumers switching to healthier foods, with the company expecting a 3% decline in revenue this year. Second, Buffett always manages to secure better deals for himself, which enables him to generate satisfactory results even from his worst mistakes.

This article is reprinted from "Wall Street Insight," author: Long Yue; edited by Yan Wencai of Zhitong Caijing.