Will Warren Buffett "sell off" BYD too early?
Author | Ding Mao
Editor | Zhang Fan
Recently, Berkshire Hathaway, under the leadership of Warren Buffett, liquidated its position in BYD, which undoubtedly dropped a bombshell in the market and sparked in - depth discussions among investors about BYD's future prospects.
This departure from a 17 - year - long value investment naturally raises a core question: Can the "stock god" Warren Buffett always accurately "escape the peak" in the face of risks? And does his liquidation behavior have practical reference significance for ordinary investors?
The Liquidation "Myth": Successfully "Escaping the Peak" of PetroChina
To answer whether Buffett's liquidation behavior has the universality of "escaping the peak", we conducted a statistical analysis of the 24 heavily - held stocks liquidated by the Berkshire fund after 2006.
The results show that among these 24 stocks, if we take the last trading day of the quarter when Buffett liquidated his position as the benchmark, within one year after the liquidation, 13 stocks declined to varying degrees. Among them, the three stocks with the largest declines were PetroChina (Hong Kong stocks), ConocoPhillips, and Wells Fargo, with annual declines of - 70%, - 30%, and - 25% respectively.
Chart: Stocks whose prices declined after Buffett's liquidation. Data source: Berkshire annual report, compiled by 36Kr
However, if we extend the time period, within a period of 5 years or even longer, the number of these stocks that continued to decline shrank to about 6. Among them, Freddie Mac's decline exceeded 100% before its bankruptcy, and UPS's decline also exceeded 40%.
Chart: Stocks that still declined 5 years after Buffett's liquidation. Data source: Berkshire annual report, compiled by 36Kr
Among all the statistical transactions, the liquidation of PetroChina in 2007 can be regarded as one of Buffett's most successful "peak - escaping" transactions in recent years.
As China's most profitable company at that time, PetroChina was listed on the Hong Kong stock market in 2000. Soon after, it encountered a three - year decline in the Hang Seng Index. At that time, the market was filled with fear. PetroChina's stock price hovered below the value line for a long time, with a PE of less than 6 times, and was severely undervalued by the market.
In 2003, Berkshire, controlled by Buffett, suddenly announced that it had bought about 1.1 billion shares of PetroChina. Later, Buffett increased his holdings 7 times in a row within a month to 2.3 billion shares, becoming the second - largest shareholder of PetroChina at that time.
According to Berkshire's 2003 annual report data, the cumulative purchase cost of this transaction was $488 million. Converted at the exchange rate at that time, the purchase cost per share of PetroChina was about HK$1.6.
Also after 2003, boosted by both sentiment and performance, PetroChina's stock price began to soar. During the period when Buffett held the stock, the increase was nearly 840%.
This investment lasted for 4 years. In July 2007, Berkshire began to reduce its holdings of PetroChina shares in batches at a price of about HK$12. By mid - October, it had sold all its PetroChina shares at a price of $4 billion, ultimately making a profit of more than 7 times. At that time, PetroChina's PE was close to 20 times.
After being liquidated by Berkshire, PetroChina's stock price did not immediately decline. Instead, it continued to soar, reaching a record high valuation of more than $450 billion in early November of the same year.
However, the good times did not last long. At the end of the same year, PetroChina returned to the A - share market. Its stock staged a final frenzy and then began to decline along with the A - share market, falling into a long - term bear market.
If we calculate from the day when Buffett completely liquidated his position in PetroChina, within the following year, the stock price of PetroChina's Hong Kong shares declined by nearly 70%. Although there were fluctuations later, as of now, the cumulative decline is still more than 10%.
Chart: PetroChina's stock price continued to decline after Buffett's liquidation. Data source: Wind, compiled by 36Kr
If the investment in PetroChina was a classic battle for Buffett to adhere to the safety margin, then the liquidation of Freddie Mac in 2000 reflected his keen grasp of potential risks as a professional investor.
At the end of 1988, Berkshire continuously bought Freddie Mac shares. Even when the U.S. real estate market declined in 1992 and the stock price plunged by more than 60%, Buffett still firmly believed in it and invested an additional $400 million to significantly increase his holdings.
As Buffett expected, in the following years, Freddie Mac's stock price began to rise.
However, this investment suddenly stopped in 2000. Due to concerns about the risks of financial derivatives trading, especially after sensing the "fraud" signal from Freddie Mac's management, Buffett resolutely liquidated his position in Freddie Mac. The liquidation price was about $45 - $50 per share. It can be calculated that during the 12 - year holding period, Freddie Mac contributed an amazing return of about 8.5 times to Buffett.
After Buffett liquidated his position, although Freddie Mac's stock price remained volatile at a high level, in fact, before the 2008 financial crisis, its stock price did not continue to soar as before. Instead, it started to move sideways at a high level, with a cumulative decline of about 10% from 2001 to October 2007.
After the 2008 financial crisis, Freddie Mac suffered huge losses because it underwrote a large number of subprime loans in this real estate bubble and finally exited the historical stage completely in the form of bankruptcy.
Chart: Freddie Mac's stock price plunged after Buffett's liquidation. Data source: Wind, compiled by 36Kr
The Regret of "Selling Too Early": Underestimating Walmart
Although Buffett is sensitive to risk control, and his liquidation behavior has a certain warning effect on the market in the short term. However, from the statistical results, in the past 20 years, Buffett still has a 45% probability of "selling too early".
If we extend the time period, this probability of selling too early further increases. Among them, companies such as Johnson & Johnson, Procter & Gamble, Costco, IBM, and Walmart have all been "misjudged" by Buffett.
Chart: Stocks that Buffett sold too early. Data source: Berkshire annual report, compiled by 36Kr
In 2006, Buffett first established a position in Johnson & Johnson. In the following years, he continuously increased his holdings. The proportion of Johnson & Johnson in Berkshire's portfolio once exceeded 5%.
However, starting from the third quarter of 2011, Buffett entered a continuous reduction phase. By the fourth quarter of 2012, he had reduced his holdings to only 327,100 shares in a liquidation - style reduction. Finally, in the third quarter of 2023, he completed the full liquidation. During the 6 - year holding period, the cumulative increase in Johnson & Johnson's stock price was about 45%.
However, after Buffett sold a large amount of Johnson & Johnson shares in 2012, Johnson & Johnson's stock price not only did not decline but also had a better upward trend.
If we take 2013 as the starting point, in the following five years, the cumulative increase in Johnson & Johnson's stock price reached 130%. As of now, the increase is more than 260%, far better than the performance during the period when Buffett held a large position.
Chart: Johnson & Johnson's stock price continued to rise after Buffett's liquidation. Data source: Wind, compiled by 36Kr
Another typical example of Buffett "selling too early" is Walmart.
Buffett's investment in Walmart started in 1998. By 2014, Walmart's market value accounted for nearly 5% of Berkshire's portfolio.
However, starting from the third quarter of 2015, Buffett reduced his holdings of this favorite stock that he had held for more than 15 years. After that, he reduced his holdings more than 5 times successively. In the fourth quarter of 2016, he completed most of the liquidation and finally completed the full liquidation in the third quarter of 2018. During the 20 - year holding period, Walmart's stock price increased by nearly 6 times, contributing considerable returns to his portfolio.
However, after Buffett liquidated his position, Walmart's stock price continued to rise. From the third quarter of 2018 to the present, the cumulative increase in the company's stock price has also exceeded 2.5 times.
Chart: Walmart's stock price rose after Buffett's liquidation. Data source: Wind, compiled by 36Kr
Effective in the Short - Term, but Less Reliable in the Long - Term
In summary, from the statistical results of the past 20 years, if we regard the decline in the stock price after Buffett's liquidation as a successful "peak - escape" and the rise in the stock price as "selling too early", then the probability of successful peak - escape in history is about 55%. However, if we extend the time period, this probability is actually only about 20%.
This indicates that Buffett's liquidation behavior does have a certain warning effect on the market in the short term. However, in the medium - and long - term, if we use his liquidation behavior as a market indicator, the reliability will be greatly reduced.
The reasons behind this are as follows: First, long - termism and operational inertia. Buffett is a typical long - term investor. Once he holds a large position in a stock, he will not easily change his position due to short - term market fluctuations. Similarly, his decision to liquidate a position is often a long - term process. Once he makes a decision to liquidate, he usually no longer considers short - term fluctuation opportunities and will conduct long - term, batch - by - batch reductions until the full liquidation; Second, value investment and the supremacy of the safety margin. Buffett adopts a bottom - up value investment strategy. The stocks he selects usually have good fundamentals, strong moats, and relatively reasonable valuations. However, when a company's valuation significantly deviates from its intrinsic value, in order to adhere to the principle of the safety margin, Buffett generally chooses to sell and invest the funds in new stocks with higher cost - effectiveness; Third, the continuity of Buffett's liquidation behavior is often because there has been a change in one of his core judgments about the company. This may be due to insufficient safety margin caused by over - valuation (such as PetroChina), systematic risks due to the deterioration of the industry environment (such as BYD), or management or other risk hidden dangers (such as Freddie Mac).
What Does Buffett's Liquidation of BYD Imply?
As mentioned above, Buffett's liquidation behavior does have a certain risk warning effect in the short term. This is also easy to understand for BYD.
Buffett made a large - scale investment in BYD between 2008 and 2009. At that time, the domestic electric vehicle industry was in the initial expansion stage driven by the new energy revolution, and the industry as a whole had very considerable beta space.
Chart: BYD's stock price performance in different periods. Data source: Great Wall Securities, compiled by 36Kr
As the most thorough domestic car company in the transformation to new energy at that time, BYD had an obvious first - mover advantage. In the following years, BYD quickly occupied the market by virtue of a large product cycle such as the Dynasty, Ocean, and Yangwang series, as well as the cost advantage of full - stack self - research on blade batteries and key components, and gradually became the leader in the domestic electric vehicle market.
