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Warren Buffett’s Berkshire Hathaway sold its Costco stake last quarter. Here are 3 reasons why that’s extremely surprising

Summary List Placement Warren Buffett's Berkshire Hathaway sold its Costco position after investing more than 20 years ago, a filing revealed this week. The billionaire investor's company grew its stake in the big-box retailer from 355,000 shares worth $32 million in 1999, to 4.3 million shares worth $1.3 billion in June...

warren buffet charlie munger

Summary List Placement

  • Warren Buffett’s Berkshire Hathaway sold its Costco position after investing more than 20 years ago, a filing revealed this week.
  • The billionaire investor’s company grew its stake in the big-box retailer from 355,000 shares worth $32 million in 1999, to 4.3 million shares worth $1.3 billion in June of this year.
  • The sale is a shock because Buffett famously invests for the long term, two of Berkshire’s directors sit on Costco’s board, and both Buffett and his business partner, Charlie Munger, have repeatedly praised the retailer.
  • “If once or twice in a lifetime you’re associated with such a business, you’re a very lucky person,” Munger said about Costco in 2011.
  • Visit Business Insider’s homepage for more stories.

Warren Buffett’s Berkshire Hathaway revealed this week that it dumped its stake in Costco last quarter, exiting an investment it made more than 20 years ago. The sale is surprising for several reasons. 

The investor’s company grew its position in the big-box retailer from 355,000 shares worth $32 million in December 1999, to 4.3 million shares worth $1.3 billion at the end of June this year. Costco’s stock price skyrocketed from less than $50 to north of $300 in that timespan, a roughly 500% increase.

Many investors would be tempted to cash out at that point, but Buffett has famously said his “favorite holding period is forever.” 

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The close ties between Berkshire and Costco add to the mystery. Charlie Munger – Buffett’s longtime business partner and Berkshire’s vice-chairman – has been a Costco director since 1997 and personally owned more than $60 million worth of its stock as of last month, regulatory filings show.

Susan Decker, another Berkshire director, also sits on Costco’s board, cementing the two companies’ close relationship. Moreover, Buffett and Munger have heaped praise on Costco many times over the years.

“Costco is an absolutely fabulous organization,” Buffett said at Berkshire’s annual shareholder meeting in 2000. “We should have owned a lot of Costco over the years. Charlie was for it, but I blew it.”

Munger shared some of his reasons for admiring the company – which sells products in bulk at cheap prices via hundreds 0f members-only warehouses – at Berkshire’s meeting in 2011.

He said: “Costco is a business that became the best in the world in its category, and it did it with an extreme meritocracy and an extreme ethical duty, self-imposed, to take all its cost advantages as fast as it could accumulate them and pass them on to the customers. And, of course, that created ferocious customer loyalty.”

“It’s been a wonderful business to watch,” Munger continued. “If once or twice in a lifetime you’re associated with such a business, you’re a very lucky person.”

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Buffett followed Munger’s comments by poking fun at his partner’s Costco obsession with a fictional story, which can be found in full at CNBC’s Warren Buffett archive

“Charlie and I were on a plane recently that was hijacked,” he said. “The hijackers picked us out as the two dirty capitalists that they really had to execute.”

“But they were a little abashed about it,” Buffett continued. “They didn’t really have anything against us, so they said that each of us would be given one request before they shot us, and they turned to Charlie and they said, ‘What would you like as your request?'”

“I would like to give once more my speech on the virtues of Costco, with illustrations,'” Munger replied, in Buffett’s telling.

“Well, that sounds pretty reasonable to me,” the hijacker responded. “And what would you like, Mr Buffett?”

“Shoot me first,” Buffett quipped.

An unexpected exit

Buffett and Munger showered Costco with compliments as recently as the 2018 annual meeting. “I like everything about it,” Munger said, ticking off the company’s cheap real estate, competitive position, and quality personnel. 

“Costco has an enormous appeal to its constituency and they surprise and delight their customers,” Buffett said. “There is nothing like that in business. If you have delighted customers, you’re a long way home.”

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Berkshire’s Costco position wasn’t significant in scale: Buffett’s company only owned about 1% of the business in June, and the holding accounted for less than 1% of the total value of its portfolio.

However, Buffett and Munger’s repeated praise of Costco for more than two decades, the retailer’s deep ties to Berkshire, and Buffett’s historical aversion to selling high-quality holdings make the sale an undeniable surprise. 

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