Warren Buffett Admits His 2021 Sale of This Stock Was "Probably a Mistake." Is It Too Late to Invest in Costco?

Warren Buffett is known for being one of the greatest investors of all time. For its part, Costco Wholesale (NASDAQ: COST) has been one of the greatest stocks to buy and hold over the very long term, considering it's up by more than 14,000% since 1985. And yet, Buffett's history with Costco stock surprisingly isn't perfect.

Buffett's late right-hand man Charlie Munger, however, had a much better track record with Costco. Not only was Costco one of only three stocks in Munger's personal portfolio, he also sat on its board of directors.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

In perhaps the funniest joke I've ever heard, Buffett once told a fictitious story in which he and Munger were taken captive by airplane hijackers who offered them each one last request before their executions. Munger, said Buffett, requested to explain in detail about the greatness of Costco's business model one final time. For his part, Buffett asked to die first.

Buffett has always exercised considerable control over the stock portfolio decisions at Berkshire Hathaway. And the company did actually start buying shares of Costco way back in 2000. In June 2020, when the stake had grown to about 4.3 million shares worth $1.3 billion, he sold it all and closed the position.

Breaking down Buffett's mistake

At the 2021 meeting of Berkshire Hathaway shareholders, Buffett mentioned how, against the advice of Munger, he had Berkshire sell its Costco stock, and that it was probably a mistake. Now, with the benefit of more extended hindsight, we can see that it was definitely a mistake.

From June 2020 until now, Costco stock has gained more than 200%, handily outperforming the S&P 500.

COST data by YCharts.

Deciding if and when to sell a stock is rarely an easy decision. And if Buffett can make mistakes, any of us can. But back in 2020, was there anything that would have inspired investors to keep holding?

I believe Buffett would have continued holding Costco stock if he had simply followed his own advice. Regarding Berkshire selling a stock, Buffett has reportedly said that he will sell "when we think we're reevaluating the economic characteristics of the business." But the economic characteristics of Costco's business model are incredibly resistant to change.

Investors might be tempted to think of Costco like any other retail chain. But its "real" business is selling memberships. Its merchandise sales are incredibly high volume, but with razor-thin profit margins -- the goal is to sell products to its members at the cheapest prices possible. By contrast, the memberships are essentially pure profit -- and account for nearly all of the company's earnings.

The beauty of this business model is that Costco retains the large majority of its members from year to year and attracts new members with relative ease -- they're all pleased with the prices they pay at its stores. This results in an incredibly predictable revenue stream from membership fees. Because of this, the economic characteristics of the business don't change much. So if Buffett had followed his own standard advice, he might have held on to Costco.

But should investors buy Costco stock today?

Deciding to sell a stock is a different exercise than deciding to buy a stock. If one is thinking of buying, one needs to have an investment thesis that justifies it -- a theory about what's happening in the world that will impact the company, how the company will benefit from those trends, and whether the stock is trading at a low enough value relative to its potential upside to make an investment in it profitable if things go the way one expects.

I believe there are a couple of things that investors need to keep in mind about Costco today. First, the company's profits are growing, which is good. But their growth rate is somewhat average, and may be sliding below the level necessary to support market-beating investment results.

Consider that in its fiscal 2020, which ended in August 2020 (around the time Buffett sold), Costco had operating income of $5.4 billion. In its fiscal 2024, which ended in September 2024, it had operating income of $9.3 billion.That 71% growth over four years results from growth at an annualized rate of 14%. That's toward the lower end of what market-beating investments typically generate.

Moreover, Costco's operating income growth has slowed to 12% in the first half of its fiscal 2025. Given the modest opportunities for growth ahead, its profit growth could slow further.

Second, Costco stock has soared in recent years partly as its valuation multiples have surged. For example, its earnings per share have doubled in the last five years. But its price-to-earnings (P/E) ratio has increased from around 35 to about 57 -- a more expensive ratio than hyper-growth stock Nvidia.

COST data by YCharts.

In spite of its stellar business model and strong past stock performance, buying Costco stock at today's elevated valuations with slowing growth might not be the best recipe for success.

In summary, Buffett clearly erred in selling Costco stock back in 2020. But that doesn't necessarily mean it's a timely buy today.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $277,401!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,128!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $467,393!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

Continue »

*Stock Advisor returns as of March 10, 2025

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Costco Wholesale, and Nvidia. The Motley Fool has a disclosure policy.