Warren Buffett is the most successful investor of our time. Still, he just suffered a multibillion-dollar loss on one of his high-profile investments.

What can we learn from this? Let’s explore with the help of a chart.


Please click here for an annotated chart of Kraft Heinz KHC.  Please note the following:

• The chart shows a big jump in the stock on the Heinz and Kraft merger. The market was excited about the involvement of Warren Buffett and his Berkshire Hathaway BRK.B  in the deal.

• The chart shows that The Arora Report gave a signal to sell or short-sell Kraft Heinz on the news. We wrote: “Consumer tastes are changing and neither company is aligned with the new trend.”

• This short signal was one of the hardest we have given, for two reasons. First, who in their right mind would want to short what Buffett was buying? Second, now years later with the benefit of hindsight, it is clear that our statement about consumer tastes was prescient. However, at that time, the prevailing wisdom was that organic and healthy food was a niche business and it was not going to adversely impact brands such as Kraft and Heinz, both of which sell processed food.

• As the chart shows, it was a cost-cutting story for a long time.

• The chart shows Kraft Heinz attempted a global-brand grab by offering $143 billion for Unilever UN.  For those unfamiliar with Unilever, it is a global British-Dutch consumer-goods company on par with the more familiar name of Procter & Gamble PG.

• The chart shows that the Unilever bid was quickly abandoned.

• As the cost cutting ran its course and was not providing any new benefits and Kraft Heinz could not find a major acquisition, it simply became a story of the “hope” strategy and Buffett’s halo.

• As the chart shows, during a period in which the Dow Jones Industrial Average DJIA,  S&P 500 ETF SPY and Nasdaq 100 ETF QQQ performed well, Kraft Heinz lost a big part of its value.

• The chart shows that, finally, the long-overdue admission from the company came and the stock fell.

• Investors who were not paying attention to the “change” were hit with a bombshell. The change is that consumers are no longer buying processed food and are opting for healthier foods.

• The chart shows the two biggest volume days — the first on Buffett’s buy and the second on the bombshell.

A strategy that works

Buffett’s loss can help us understand a strategy. The strategy is to focus on change. In the case of Kraft, the change in consumer taste was happening. Buffett acknowledged Monday that he overpaid for Kraft.

Please click here to see five stages of a long trade based on change.

Please click here to see five stages of a short trade based on change….Read more at MarketWatch.

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