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What We Can Learn From Warren Buffett's Kraft Heinz Investment

Warren Buffett (Trades, Portfolio) has admitted that his decision to invest in The Kraft Heinz Co. (NASDAQ:KHC) was a mistake. However, as an article published on The Motley Fool recently pointed out, this mistake has been a profitable one for the Oracle of Omaha and his shareholders.


Profitable position

According to the calculations presented in the article by Fool contributor Keith Noonan, Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has booked a profit of roughly $3.65 billion on its initial investment in Kraft Heinz, which it has held since 2015. That's a 37% return.

So, based on these figures, Buffett hasn't lost money, but he has underperformed the S&P 500. Kraft and Heinz started trading as a combined company on July 6, 2015. Since then, the S&P 500 index has produced a total return of 63%.

Berkshire owns just under 27% of the consumer goods giant, a sizeable stake that prevents the company from selling its position. If Buffett did decide to sell, it is almost certain that his actions would push the stock price down further, inflicting further losses on Berkshire's investors.

So it doesn't look as if the Oracle of Omaha will be trying to exit his position anytime soon.

A lesson learned

Buffett has admitted that he overpaid for Kraft Heinz, but there's another important lesson for investors here as well.

Indeed, while Kraft might not be a market-beating investment, it is still a profitable one. Buffett has made money on the position even though the stock has not outperformed the market. There is also a chance that the stock could make a recovery over the long term if it manages to draw customers back to its products.

Buffett has always focused on risk when analyzing companies. Whenever he is examining a potential investment, he always focuses on the risk of permanent capital impairment, rather than trying to calculate the potential upside. This ensures that he does not end up breaking either of his top two rules of investing.

We've seen this strategy play out with Kraft. The stock might not have achieved the sort of market-beating returns Berkshire's investors might have hoped for, but the position has been profitable. It has not yet inflicted a permanent capital impairment on Buffett and his shareholders.

Dealing with a losing position

This lesson is not particularly crucial for index fund investors, but it is for those who try to outperform the market by picking single stocks. Buffett's interaction with Kraft probably tells us more about his mental approach to investing than any of his winning positions.

Every investor will, at some point in their careers, have to deal with a stock that underperforms or generates a loss. How you deal with this position can make or break an investment career.

Averaging down on a stock that then goes to zero can set you back years. Cutting your losses, on the other hand, might be painful in the short term, but is bound to be the right decision over the long term if the stock ends up going to zero.

When you have a position like Kraft, however, where the chances of the company going out of business are relatively slim, it might not pay to sell up and move on. Yes, Buffett is limited in what he can do with the position because of its size, but I'm sure that if he wanted to get out, he could.

These are just some thoughts on Buffett's investment strategy and what we can learn from his experience with Kraft. At the end of the day, he has made money on the position according to the analysis published on The Motley Fool. For many investors, that's all that matters.

Disclosure: The author owns shares of Berkshire Hathaway.

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This article first appeared on GuruFocus.