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Warren Buffett’s buy-and-hold mentality has paid off nicely, but he also knows when and how to sell.
Buy and hold is still alive. Warren Buffett is one of the greatest testaments to that.
As I noted in Monday’s issue of Income & Prosperity, Buffett was buying Coca-Cola (NYSE: KO) in the 1980s when it was just $5 a share and Wells Fargo (NYSE: WFC) in the 1990s at $3 a share.
He’s made multiples on his money from these “forever stocks” since then. And a big reason is that he held on through the good and bad times.
WaPo Windfall
One of the best examples of this principle is his investment in The Washington Post Co. Buffett’s Berkshire Hathaway (NYSE: BRK-B) started buying up shares of the newspaper company in the early 1970s. It built a 10% stake, with a cost basis of roughly $11 million.
At the time, Buffett recalls The Washington Post trading at a $100 million market value, while he calculated the value to be well over $400 million – truly an undervalued company.
Really, the investment was a play from Peter Lynch’s “invest in what you know” strategy. Buffett lived in Washington, D.C. for a long time, and even delivered the newspaper door to door as a kid.
At one point, Buffett’s stake was valued at over $1 billion, but it fell to close to $700 million in the mid-2000s. At the end of the day, he’s a disciplined investor and held on through the turmoil.
What’s more is that Buffett actually thought about buying The Post outright in 2013 when shares were slumping. He had been on the board for over 20 years and was its largest outside shareholder. And he has a special affinity for newspapers, having bought several through the years, including the Omaha World-Herald.
But he apparently kept a level head and didn’t let his emotions cloud his judgement. For Buffett, it’s all about price. More specifically, value. The valuation just didn’t make sense for Buffett. The Washington Post was losing money.
Instead, Amazon.com’s (NASDAQ: AMZN) Jeff Bezos stepped in and bought the flagship newspaper for $250 million in 2013. By the time of the sale, Buffett owned close to 20% of the company. (Although he never purchased a share after the early 1970s, buybacks boosted his ownership through the years.)
Helped by the Bezos buyout, Buffett was able to turn $11 million into about $1.1 billion in roughly 40 years – a 9,900% return. For comparison, the S&P 500 index produced a return of 1,450% from the start of 1973 to the end of 2013. Put another way, Buffett realized a 12% annualized return for his Washington Post stake, while the S&P 500 returned just 7%.
Icing on the Cake
Then, in a classic Buffett deal, he was able to sidestep paying taxes on that hefty gain. Shortly after The Washington Post buyout, Berkshire decided it was time to lock in those gains by swapping its Graham Holdings (NYSE: GHC) stock – former parent company of The Post – for assets.
An asset swap is a non-taxable exchange. So in exchange for Berkshire’s equity stake in Graham Holdings, Berkshire received about $327 million in cash, just over $400 million in Berkshire Hathaway stock held by Graham Holdings, and a Miami TV station worth $364 million. Add in the favorable tax treatment, and it was clearly a win-win for Graham Holdings and Buffett.
Buying and holding works. Knowing when to sell is tough, and sometimes even Buffett gets out too early. However, when trends and facts change, be sure to look at things with an independent view. It also doesn’t hurt if – like Buffett – you can be a bit tax savvy.