When your stock position loses over 70%, and you watch $20 billion disappear, you might want to question why you are still in the stock. It’s not always easy to get out though.
When Kraft Heinz dropped off the table last February, closing the week on Friday at $48.26 and opening up again on Monday all the way down to $35.85, people immediately thought of Warren Buffett and his company Berkshire Hathaway’s 325 million shares and did some quick math.
That’s a lot of money to lose over a bad weekend, but this party had been going on for much longer than just the effects of the disappointing earnings report shared by the company after the bell on that Friday. This was in fact just one of several significant bumps down that this stock had encountered on the way down from its high of $96.65 two years earlier.
That all adds up to a “loss” of $20 billion from Berkshire Hathaway’s mark-to-market valuation on its books. It’s not that they could have banked this $20 billion, even if they had been visited by an all-knowing spirit who had shown them the current chart by visiting the future and pleaded with them to sell, because they would not have gotten this $96.65, what the last trade settled for on that day.
If we had far less than 325 million shares to move, as in 100 or even 1000, we might have been able to move our shares at that price or something very close to it, if we were visited by the same spirit and had complete confidence that this information was valid.
Spirits don’t visit investors all that often, even ones as renowned as Mr. Buffett, and he’s perhaps the last person who is interested in timing his investments to seek out a high of a move. It’s not that he could ever do that even if he wanted, as moving this much stock just cannot be done on the spot and takes quite a bit of time to execute.
The small number of shares that we might own in a company as typical individual investors can be sold at the market, where we will see offers to buy our stock in the quotes. We might only see 100 shares on a level 1 screen but there are always tiers offers out there in the book, larger amounts at prices lower than the best offer that we usually see if we do not have access to the book as a trader or broker would.
You Just Can’t Move 325 Million Shares of a Stock That is Crashing Already
Placing an order of this size on the books would simply be crazy, as this would, among other things, show our hand, show how much we have to sell and then we can count on just being taken to the cleaners completely. We’ll be taken their anyway, as all this extra selling pressure is going to drive the price of the stock down a lot anyway with our taking our time, and we can’t just add to it and not expect to have things come out a lot worse.
Having to sell your stock over a longer period of time, weeks or months, is going to introduce another type of risk though, and a big one at that. As you sell more and more each day, and the stock is going down anyway, this will accelerate its decline, and each day you do this you will tend to get less for it. Other investors will see this all happening and likely pile on and hasten the very thing you are looking to avoid, taking a bigger hit and a lot more slippage than you would want or even be comfortable with.
In some businesses, dealing in high volumes can be an advantage, but with shares of stocks, it’s a big disadvantage. When you trade in the sizes that Warren Buffett does, this disadvantage is an extreme one.
Buffett had hung on from $96 to $44 and didn’t flinch, so there wasn’t any real reason why it going to $34 would get him to change his mind, or for that matter, the $27 that it is currently at. When asked what he would do after the instant drop of over $12, Buffett was quick to tell us that “I have no intention of selling.” That should not have come as any surprise actually, and few expected anything different.
He also said that “I have no intention of buying,” and when asked why not, he responded with “it isn’t worth as much.” This might be akin to someone in a fight who just got knocked to the ground and bloodied, and got up and vowed to fight on, but would probably not want to put even more money on the outcome of the match.
We had spoken about the potential for a bottom play with this back when it all happened, and advised that this could happen if the stock got enough love and it showed us that it had come back from the dead, but at the time it had not, and it still has not. There is plenty lacking with this company, and not a lot very exciting on the horizon, so staying put at this point was the correct move for him, even though as individuals we should have run for our lives much sooner than all this.
Buffett simply does not have the same freedom though, as if he decided to sell at this point, you would have seen the price tumble even more. When you add in the fact that the most famous buy-and-hold investor of all time is getting out, that would have really sent people running to the exits to escape.
When we look at the wisdom of dumping this much stock when it is down and the future does not look so bright, we therefore can’t just look at the charts and wonder why he didn’t get out at $34 or $32 when it’s at $27 now. There just wasn’t any way he could have got $34 or $32 or anything close to it, and probably not $27 either for that matter, given that the price tumbled that low without his help. With his help, with a full-on effort to get out, we would be seeing much more of a decline.
The only thing that really stops a stock from falling is when the price gets low enough where the interest in buying it starts to exceed the selling interest. We do see this happen but we haven’t seen any of it thus far with Kraft Heinz since it crashed, and very little in fact over the last 26 months in fact.
He may have found some big investors that were willing to take all this stock off of his hands for a price, but given the situation, that price would have to be at a steep discount. They do not want to get in now, so you really have to make this tempting enough.
Kraft Heinz Breaks Out to the Downside Again
Wherever the bottom ends up being, it’s not here yet, and might not come for a while. Kraft Heinz ended up trading in a pretty tight range after the fall, between $32 and $33, sometimes managing to get a little above or below these prices but not by much and not for long.
The concern was what would happen once it broke out of this range, with breaking above and staying there for a while being bullish, and breaking below this being quite bearish. We did break below this finally last week, and now we’re off to the races, and have added to the overall loss of the long bear run it’s been in.
When you’ve already lost over 70% of a stock’s value during a decline, there just isn’t that much more to lose. When you drop $70 a share and there’s only $27 left, the stock going to zero will only represent less than a third of your overall losses, not that this would happen. If it goes down another $10 a share, to $17, that is more realistic, but you’d probably still want to take your chances instead that things don’t stay that low forever. If you are in no hurry, there is no reason to.
Some might question whether Buffett should not have scaled out of this a long time ago, but his getting out now makes very little sense, especially since he’s in this for the long run and how it does in 2019 is of little concern to him ultimately.
Kraft Heinz is certainly not a very good buy right now and no one is really stepping up to buy much of it, as they share the same view as Buffett, which is that this is not the right time to do it, and maybe that time doesn’t even come in the foreseeable future. The company will need to turn things around significantly for this to happen, and when it does, the value players will likely start to come around in due time.
Kraft Heinz has taken such a bad beating lately though that its potential for profiting from shorting it isn’t so great either, although if we had to choose a side, the short side should be clearly preferred right now. More bad news may be coming very soon, and the market has already hit its tolerance level for this sort of thing and may push it even lower.
Warren Buffett does like to stand pat more than your average investor does, and while there are certainly times where standing pat is not the best choice, in some cases there really aren’t better options. His current dilemma with Kraft Heinz is one of them. It is not hard at all to see how something like this could have happened, and this is the price you can pay for trading in hundreds of millions of shares, where any the average price of any potential exit is so far below the market that it can make more sense to just cross your fingers sometimes.
For the rest of us, hopefully we are not in this stock, and if we are, we should check out of the hotel now before the damage gets worse, and only look to get back in when this storm passes and it’s safe to do so again. When we count our money at the end of it, this may hurt, although we might try to get some solace by comparing it to Warren’s $20 billion that he has seen his positions marked down by.
That’s no real consolation though and this is a good example of what can happen when we just ignore risk. Warren has to, to some degree anyway, as he needs to give his massive positions lots and lots of room and there may not even be a good way out of some of them as they fall hard, like this one.
This is a huge handicap, and is one of the reasons why Buffett’s returns have failed to keep up with the market over the last decade. He has done pretty well overall when we account for his additional challenges, but we need to think twice if we ever want to chain ourselves to him or anyone else that manages mega sized positions, lest we get drawn into the abyss that sometimes comes with this, one like we are seeing now.