Its not often that Warren Buffett makes a big mistake, but when he does hes honest about it and he has now described his decision to buy into Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) as a huge mistake.
The man dubbed the Sage of Omaha was a man of few words this time, saying little more than I made a mistake on Tesco. That was a huge mistake by me to CNBC yesterday, but theres a big story behind those two short sentences.
Buffett first entered the Tesco fray back in 2007 though his Berkshire Hathaway investment firm, and went in heavier in 2012 after the UKs biggest listed supermarket issued its first profit warning and the shares crashed by 16%.
Be fearful when others are greedy and greedy when others are fearful is one of the great mans maxims and he lived up to it, taking his holding over 5%.
By the end of last year, Buffetts stake of Tesco had dropped to 3.7%, but it was still worth around $1.7bn and in the past year alone, his investment has lost around $750m (or 645m) as the share price has slumped 50% to 175p (losing a further 2% today).
But heres the big question: after a string of profit warnings, the launch of an investigation into the overstating of profits by 250m, and a halving of the share price what do we do now?
With the share price back to levels last seen in 2003, theres a major risk of selling out at the very bottom if you dump Tesco now, and there would be few examples of buying high and selling low to match it. But if you hold and theres more bad news, you could end up losing still more.
On the other hand, what about that old fearful/greedy mantra? Surely the fear has escalated enormously since Buffett bought in, and its a time to be even greedier now and fill our boots with cheap Tesco shares?
Well, averaging down is usually only a good idea if nothing significant has changed since you first invested and plenty has changed at Tesco.
New boss to the rescue
So the real question is whether, with the arrival of new boss Dave Lewis, we really are at bottom for Tesco. With the shares on forward P/E ratings of under 10 for the next two year-ends, even with two years of EPS falls forecast, I see a good deal less downside risk now although I have said that once or twice before.
For the Fools Beginners Portfolio, at least, Im still holding.
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Alan Oscroft 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.