Is Warren Buffett Making A Second Mistake By Selling Tesco PLC?

Warren Buffett has betrayed his own philosophy by selling Tesco PLC (LON: TSCO) at today’s low price, says Harvey Jones

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It’s always disarming when people freely admit their mistakes. Investment legend Warren Buffett lost no admirers by confessing that his decision to buy Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) was a “huge mistake”.

We all make mistakes. It’s reassuring to find ourselves in such exalted company.

Buffett is looking to make amends by belatedly offloading 245 million Tesco shares, to reduce Berkshire Hathaway’s holding to below 3%.

With the share price down more than 50% in the year, he will have made a massive loss. Luckily, he can afford it.

Betrayal

Buffett has admitted that he made a huge mistake by buying Tesco shares. But has he just committed another? By selling his shares in Tesco today, he is turning his paper losses into real losses.

His Tesco transactions have also betrayed his own philosophy. Instead of getting greedy when others are fearful, and fearful when others are greedy, he has done the reverse.

He was greedy for Tesco when everybody else was greedy for Tesco, and fearful when everybody else was fearful.

Buy On Bad News

Here at the Fool, we’re bananas about Buffett — but we also regularly warn investors not to do what he has just done, namely buy at the top and sell at the bottom.

Today looks like the wrong time to dump Tesco. Most of the bad news is in. The profit warnings are out there. The accounting scandal is being sorted. We know the dividend will be cut by 75%. Aldi and Lidl have lost the element of surprise.

New boss Dave Lewis is the beneficiary of all this, as it frees him to introduce radical change. The market is willing him to succeed. If he can transform public perceptions of the stricken supermarket, his stock will rise even faster than Tesco’s.

On The Contrary

Tesco is still the UK retail behemoth, but it now trades at an incredibly cheap 5.4 times earnings. 

Management still anticipates ginormous trading profits of between £2.4bn and £2.5bn this financial year, even if that is down from original analyst expectations of £2.8bn.

The UK, Tesco’s home market, is growing faster than any other major economy. Employment is up, and if wages finally start rising too, that could put more money into shopper’s pockets.

Markets won’t be surprised if Tesco delivers more bad news, But any good news will come as a nice surprise, and investors like nice surprises. Tesco looks like a tempting contrarian buy right now — provided you don’t mind being contrarian to the greatest investor of them all.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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