Here are two cases that deal with Buffetts sale of Nike stock and his purchase on IBM stock.

A. The Nike Sale

Berkshire Hathaways 13-F filing for the third quarter of 2010 reported that Warren Buffett had reduced his stake in Nike, Inc. by $224 million, bringing his holding to 7.62 percent of the 480 million outstanding shares. Nike reported a core return on net operating assets (core RNOA) of 32.7 percent in its annual report for the year ended May, 2010. A summary of its balance sheet at fiscal-year end follows: Net operating assets $ 5,318 million Net financial assets 4,436 Common equity $ 9754 million In mid-July, at the time that the annual report was published, Nikes shares traded at $68 each. By the end of September, the price had risen to $81. Evaluate Buffetts decision to sell by calculating the expected return from buying at the market price in mid-July with a forecast that Nike can grow residual operating income at 4 percent per year. Now make the same calculation for the September price. Do you see why Buffett may have sold?