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Was Warren Buffett Right Dumping These Stocks?

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Warren Buffett is a savvy investor that always focuses for the long-term horizon while picking stocks. For example, Mr. Buffett held shares of Coca-Cola and American Express for at least more than a decade, both companies being included in Berkshire Hathaway‘s first publicly-avaialable 13F filing for the second quarter of 2000 on SEC’s website. Mr. Buffett is an ardent advocate of long-term investing philosophy, which also stems from principles that were promoted by Mr. Buffett’s mentor Benjamin Graham. Even in his last letter to Berkshire’s shareholders Mr. Buffett said that investors should focus on a “multi-decade” horizon. Here is a full quote from his letter:

“For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime.”

Warren Buffett and Billionaires

This approach that involves picking stocks for the long-haul helped Mr. Buffett to significantly increase his fortune and build one of the greatest business empires. Billionaire investor rarely makes any big moves regarding his equity holdings, which can be noticed from analyzing Berkshire’s 13F filings. Mr. Buffett also doesn’t add many companies to his equity portfolio or sells out many positions, which is why such moves are always scrutinized by the masses after the release of Berkshire’s each 13F filing. For example, in the last round of 13F filings, Berkshire disclosed a new $1.51 billion stake in Deere & Company (NYSE:DE). Coincidental or not, Deere’s stock gained 3% the next day after the 13F filing was released.

However, even though Mr. Buffett is probably the greatest investor in the world, his alpha is not generated only by his investments in equities, but rather Berkshire’s subsidiaries and other investments play more important roles. Moreover, Mr. Buffett has around $110 billion in equities and stock picks that might work well for him, might turn out not so profitable for investors with much smaller amounts of capital. In fact, the same “rule” applies to most investors, as we have discovered at Insider Monkey by analyzing historical data from 13F filings for more than 10 years. As we have found out, mega-cap stocks which are very popular not only among investors but also among the public have not performed so well in backtests. In fact, a portfolio that consists of 50 most popular stocks among over 730 funds from our database underperformed the market by 7 basis points per month and generated a monthly alpha of 6 basis points. Another interesting point that we identified is that small-cap picks tend to perform much better as our small-cap strategy managed to return 132% between mid-2012 and the beginning of 2015, beating S&P 500 ETF by over 79 percentage points over 2.5 years.

Let’s get back to Mr. Buffett though. He rarely makes mistakes and when he does he prefers to admit it, like he did in the case with the UK retailer Tesco, which costed Berkshire around $750 million in losses after the position was closed. Moreover, over the years, Mr. Buffett sold in and out of different companies and we have picked three stocks in which the investor held massive positions and closed them in the last couple of years.

The most recent case involves Exxon Mobil Corporation (NYSE:XOM). Up until the fourth quarter of 2014, Berkshire held 41.13 million shares, but as the stock slumped amid issues with oil prices, Mr. Buffett decided to sell out the stake that he held for almost two years. Exxon Mobil Corporation (NYSE:XOM)’s stock lost another 9% since the beginning of the year and the future looks somehow bleak for the company as its cash flow fell in the fourth quarter to the lowest level since recession and the company already said that it would cut its buyback program by two-thirds to $1.0 billion and cut other costs in order to preserve cash, signaling that it doesn’t expect a rebound in crude prices any time soon. In Year-to-Date terms, Exxon Mobil Corporation (NYSE:XOM) underperformed both integrated Oil & Gas industry, which inched down by 0.70% and the S&P 500 which gained 0.30%. Nevertheless, Exxon, which was several months ago the largest company in terms of market capitalization, remains to be one of the favorite energy stocks among investors, despite a significant outflow of capital during the fourth quarter. Among the funds that we track, Donald Yacktman’s Yacktman Asset Management cut its stake in the company 50% to 7.01 million shares, while Ken Griffin of Citadel Investment Group surged its position by 150% to 2.82 million shares. Since Mr. Buffet has closed the position only a while ago and with a lot of uncertainty around oil, we need some time to see if his move out of Exxon Mobil Corporation (NYSE:XOM) was made at the right time.

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