Recently, Warren Buffett has made headlines by selling all of his shares in Exxon Mobil (NYSE:XOM), the rest of his position in ConocoPhillips (NYSE:COP), and reducing his stake in National Oilwell Varco. This has people wondering if the glory days of oil investing are over.
Warren’s opinion of oil investments carries a lot of weight, because over a 32 year period, Warren Buffet’s Berkshire Hathaway portfolio has generated an average annual return of 24 percent. His most famous investments are Coke (KO), American Express (AXP), and Gillette (PG)(which is now Proctor and Gamble). These investments have made him over 3 billion dollars each. This is why when Buffett buys or sells a stock, everyone takes notice.
The problem with this generally accepted assumption is that it hasn’t been proven that his equity investing success equates to success in the resource sector. In order to find out if this accepted assumption is correct, we first have to visit Warren’s history of investing in the resource sector.
His first foray into the resource sector began in 2002, when he took a $500 million dollar stake in Petro China (NYSE: PTR). In 2007, he sold it at a profit of $3.5 billion dollars. This investment was successful because he bought it when it was undervalued. He thought the business was worth $100 billion dollars, and it was trading at a value of $45 billion dollars. That is value investing 101; buy when it’s undervalued, and sell when it’s fairly valued.
His next venture into the resource sector began in 2008, when he purchased shares in ConocoPhillips. This investment was made because Buffett claimed that the energy sector provided him the product stability that he desired.
This investment ended up costing Berkshire Hathaway several billion dollars. The first reason this investment failed was he broke his own rule; and that is “if you can’t understand it, don’t do it.†Although a great investor he maybe, he clearly didn’t understand the resource sector. Look at this chart below.
