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The Worst Trades of the Century

25 February 2016 in Investing Insights

Key Takeaways

  • If you’re feeling down about a bad trade you made, take comfort that even some of the greatest investors have made terrible investments as well.
  • For example, Warren Buffett’s firm Berkshire Hathaway has lost over $2 billion on IBM, which they’ve been heavily invested in since 2011.
  • George Soros has had to cut large losses on J.C. Penney and John Paulson has received a lot of criticism for not selling his company’s sizeable stake in gold during the 2011 highs.

Losing money in the stock market doesn’t make anyone feel good. If it’s any consolation, however, even the greatest billionaire investors such as George Soros and Warren Buffett have suffered huge losses. Sometimes you have to make the difficult decision to cut your losses or stick to your instincts and test your patience as you ride out the storm.

Here’s a look at some of the worst trades of the century. By the time you finish reading this article, you should feel better that your losses haven’t been anywhere near as bad!

Warren Buffett – Still Holding Out On IBM

One of the most renowned investors in the world is of course Warren Buffett, worth nearly $62 billion.1 Buffett has had incredible successes at Berkshire Hathaway, where he serves as CEO, chairman, and is the largest shareholder. But even Buffett can’t get every trade right and when he picks a stock that underperforms people notice.

IBM (IBM) is one such investment that many analysts have criticized Buffett for believing in over the years. Back in 2011, Buffett bought more than $10 billion worth of IBM rather unexpectedly. By the end of Q3 2011, he owned close to 6 percent of IBM’s total shares outstanding. Buffett’s conviction was so high in the company at the time that IBM constituted nearly 19 percent of his portfolio.2

But the investment has had plenty of ups and downs and is not a clear win. In October 2014 the stock plummeted and Buffett lost close to $1.3 billion on the position (on paper). But he has continued to hold IBM despite the losses and said, “the more stocks go down, the more I like to buy.”3

In the first quarter of 2015, Buffett increased his position in IBM by a further $400 million. He continued to buy an additional 1.5 million shares in the third quarter of 2015, increasing Berkshire’s position by 2 percent. In the November 2015 financial filings, his company stated it had lost $2 billion on the investment, but they still expect a recovery that should exceed the cost.5

Now Berkshire owns more than 81 million shares of IBM, or roughly $10.8 billion worth of shares, a 7.95 percent stake in the company.6

Source: CNBC, Berkshire Hathaway Portfolio Tracker as of January 20, 2016.

Here’s a look at how IBM and Berkshire’s other three largest positions have performed compared to the S&P 500 since 2011. Both IBM and Coca-Cola have been underperforming since 2013. IBM isn’t showing signs of surpassing its 2013 peak in the near term.

Source: Bloomberg

Why hasn’t Buffett thrown in the towel and cut his losses? Some of the reasons he has stuck with the investment for so long are his beliefs in the company’s financial management, operational enhancements, and earnings consistency.7 His logic also consists of IBM’s ability to purchase more shares at lower stock prices in its multi-year buyback program.

In August of 2015, he told CNBC, “People assume when we buy some stock we want it to go up. We don’t want it to go up, maybe obviously eventually, maybe five or 10 years form now, but we love the idea of a company buying its stock cheaper.”8

George Soros – Cut His Losses On J.C. Penney

George Soros is nicknamed “The Man Who Broke The Bank Of England” for making $1 billion on a short of British pounds in 1992. His latest net worth is estimated to be $24.9 billion.9 Even though he is a successful billionaire, years of investing have taught Soros that even greats like him make mistakes. He has a great quote that reads:

My conceptual framework, which basically emphasizes the importance of misconceptions, makes me extremely critical of my own decisions. I know that I am bound to be wrong, and therefore am more likely to correct my own mistakes.10

After J.C. Penney (NYSE:JCP) lost its CEO, Ron Johnson, in early 2013, Soros decided to buy almost 8 percent of the company. At the time he believed that JCP would be able to turn its business around by returning to its older business model, which customers voiced they wanted back.

But when Soros found himself facing losses in the range of 40-50 percent at the end of 2013, he decided to liquidate. Although he could have kept his position in hopes the stock would recover, he believed he could better invest his remaining capital in other investments.11

Soros was able to liquidate before the low in first quarter of 2014, but J.C. Penney has significantly underperformed the S&P 500 all but a few days while he held the stock.

billion of which was Paulson’s personal cut.12 That’s like making over $10 million a day for a year! Today, Paulson’s net worth is roughly $9.8 billion.13

Unfortunately, Paulson and his firm later became entangled in allegations regarding a collateralized debt obligation (CDO) position his fund invested in with Goldman Sachs called ABACUS. ACA, the bond insurer of the CDO, accused Paulson & Co. and Goldman Sachs for colluding and duping ACA to insure a “doomed to fail” CDO. ACA believes Goldman Sachs knew that Paulson would short the investment but withheld this information from ACA when constructing the deal. A New York state appeals court recently approved ACA’s $120 million 2011 lawsuit against Goldman can proceed.14

Paulson has also made headlines for making large losses with his trades in gold. Paulson began buying heavily into gold in 2009 because he believed it would act as a hedge against an eruption of rising inflation in the U.S., Europe, and Japan.15 Some of the stocks he purchased include AngloGold, Gold Fields, and Barrick Gold. But surges in inflation have still yet to occur.

Paulson came under much scrutiny for not selling in 2011 when gold prices ran up. In 2015, Paulson was still a believer in gold. Despite the SPDR Gold Trust being down 31 percent for two years, Paulson & Co. kept its position flat and was the largest shareholder as of March 31st, 2015 with over 10 million shares.16

In a recent government filing, however, Paulson & Co. reported they reduced their position in SPDR Gold by roughly 37 percent, from 9.23 million shares at the end of September 2015 to 5.8 million shares at the end of December 2015. Unfortunately, Paulson’s trading appears suboptimal again since gold has gained about 13 percent this year and is certainly nowhere near its 2011 highs.17

The Worst Trades Of The Century
Source: Google Finance, SPDR Gold Trust ETF

Everyone Can Experience Losses Sometimes

Nobody likes to lose money, especially in large amounts like the above examples. It’s frustrating to watch investments decline but losses can happen to anyone, even the most successful of traders.

The next time you have an investment on the decline, remember you’re not alone. Refocus on your investing goals, learn from your mistakes, and concentrate on what you can control. Stay your course and keep on investing.

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  1. Forbes, “The World’s most Powerful People: #13 Warren Buffett,” Forbes, February 20, 2016.
  2. GuruFocus, “Why Warren Buffett Keeps Buying IBM,” Forbes, January 8, 2013.
  3. Wallace, Gregory, “Warren Buffett Loses $2 Billion In Two Days,” CNN Money, October 21, 2014.
  4. Stewart, Emily, “5 Stocks Warren Buffett Has High Hopes For In 2016,” The Street, January 3, 2016.
  5. Gandel, Stephen, “Warren Buffett’s Berkshire Hathaway Ups Stake In IBM And GM, Cuts Walmart,” Fortune, November 16, 2015.
  6. CNBC, “Berkshire Hathaway Portfolio Tracker,” CNBC, February 20, 2016.
  7. Cardenal, Andres, “Warren Buffett Lost $2.5 Billion This Week, And He’s Thrilled About It,” The Motley Fool, October 26, 2014.
  8. Stewart, Emily, “Buffett Bought More IBM Stock In The Third Quarter,” The Street, September 9, 2015.
  9. Forbes, “Forbes 400: #16 George Soros,” Forbes, February 20, 2016.
  10. Dzombak, Dan, “How Warren Buffett And George Soros Make Big Mistakes — Yet Rate In Billions,” The Motley Fool, December 5, 2014.
  11. Ibid.
  12. Zuckerman, Gregory, “Profiting From The Crash,” The Wall Street Journal, March 31, 2009.
  13. Forbes, “Forbes 400: #41 John Paulson,” Forbes, February 20, 2016.
  14. Hamner, Peter, “Court Reinstates $120 Million CDO Claim Against Goldman Sachs,” Thomson Reuters, September 3, 2015.
  15. Tread gold, Tim, “John Paulson Pays A High Price For His Adventure In South African Gold,” Forbes, September 16, 2014.
  16. Roy, Debarati, “Paulson Doesn’t Blink On Gold ETF Stake Even As Prices Sputter,” Bloomberg, May 15, 2015.
  17. Javier, Luzi-Ann, “Paulson Cut Stake In Top Gold ETF By 37% Before Rally,” Bloomberg, February 16, 2016.
  1. Jeff
    1 Mar at 11:48 pm

    It’s hard to believe Buffett has still held onto IBM. He sure sticks with his “lifetime” holding philosophy. It will be interesting if one day he does end up making billions on the stock and can say “I told you so.”