Warren Buffett is famous for his declaration that his favorite holding period is “forever”. Throughout his decades at the helm of Berkshire Hathaway, the “Oracle of Omaha” has built a legendary track record by identifying businesses with durable competitive advantages—what he famously terms “economic moats”—and holding onto them through thick and thin. Companies like Coca-Cola, American Express, and The Washington Post remained staples of the Berkshire portfolio for decades.

Yet, even the most disciplined investors occasionally deviate from their own rules. One of the most famous and instructive examples in Berkshire Hathaway’s history involves a brand Buffett patronizes nearly every morning on his drive to work: McDonald’s. In the mid-1990s, Berkshire Hathaway accumulated a massive stake in the fast-food giant, only to exit the position entirely by 1998. Years later, Buffett candidly dissected the reasoning behind the sale, revealing a masterclass in how he evaluates business economics, consumer psychology, and the painful lessons of premature selling.

The Initial Investment and Sudden Exit

Berkshire Hathaway began buying shares of McDonald’s in the mid-1990s, building up a position worth roughly $1.4 billion by the end of 1996—representing more than four percent of the company. On the surface, McDonald’s appeared to be the quintessential Buffett stock: a globally recognized brand, a massive real estate footprint, consistent cash flows, and a product Buffett personally loved.

However, less than two years later, in 1998, Buffett sold every single share. In his 1998 annual letter to Berkshire Hathaway shareholders, Buffett did not hide behind excuses. Instead, he offered a blunt assessment: “The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald’s was a very big mistake.” Behind closed doors and at subsequent annual meetings, Buffett and his late partner Charlie Munger estimated that exiting the position prematurely cost Berkshire Hathaway well over $1 billion in missed gains—a figure that would balloon to tens of billions over the following decades.

Re-evaluating the Economic Moat

During Berkshire Hathaway’s annual shareholder meetings, investors repeatedly pressed Buffett to explain why he pulled the trigger on selling a company he so clearly admired. Buffett’s explanation centered not on a belief that McDonald’s was a bad company, nor that it was heading toward failure, but rather on a subtle re-evaluation of its long-term competitive advantage.

“It’s not our natural inclination to sell,” Buffett explained. “We sell really when we’re re-evaluating the economic characteristics of the business. We think McDonald’s has a fine future… But we probably don’t think that their competitive advantage is as strong as we thought it was when we initially made the decision. We think that the strengths may have been eroded to some degree.”

In his early investing career, Buffett often sold great companies simply because he had “more ideas than money” and needed cash to buy something even cheaper. By the late 1990s, Berkshire was flush with capital, meaning Buffett had “more money than ideas”. Consequently, selling was no longer about raising cash; it was strictly about whether the original investment thesis remained intact. To illustrate how a seemingly invincible franchise can quietly lose its edge, Buffett pointed to the newspaper industry. In 1970, newspapers appeared to be an impregnable monopoly. By the late 1990s and early 2000s, technological and behavioral shifts proved that even the widest moats can narrow. Buffett worried that subtle shifts in the fast-food landscape were similarly eroding McDonald’s dominance.

The Psychology of Eating vs. Drinking

A crucial pillar of Buffett’s thesis-change involved consumer psychology—specifically, the stark contrast between how people consume beverages and how they consume food. Buffett frequently compared McDonald’s to two of his favorite “forever” holdings: Coca-Cola and Gillette.

Consumers exhibit intense, habitual brand loyalty when it comes to soft drinks and razor blades. As Buffett observed, a loyal Coca-Cola drinker has virtually no desire to wake up on a Tuesday and switch to a different cola just for the sake of variety. Food, however, operates under entirely different psychological rules.

“Most people want to vary where they eat as they go through the week, or the month, or the year,” Buffett noted. “They don’t really have any great desire to vary their soft drink the same way. It’s not the same thing.”

Because diners naturally crave variety, fast-food chains face relentless competition not just from direct burger rivals like Burger King and Wendy’s, but from pizza chains, taco stands, sandwich shops, and casual dining restaurants. Furthermore, Buffett pointed out that the fast-food industry is inherently price-sensitive. During the mid-to-late 1990s, McDonald’s engaged in fierce price wars—introducing value menus and promotional discounts to defend its market share. To Buffett, needing to compete heavily on price was a telltale sign that a business lacked the effortless pricing power enjoyed by brands like Coca-Cola or See’s Candies.

Capital Intensity and Franchise Economics

Beyond consumer habits, Buffett also scrutinized the structural economics of McDonald’s business model at the time. While McDonald’s is famous today for its heavily franchised, real-estate-driven model, in the late 1990s the company directly owned and operated roughly a third of its roughly 23,000 global restaurants.

Buffett contrasted McDonald’s physical capital requirements with Berkshire’s own fast-food subsidiary, Dairy Queen (which Berkshire acquired in 1997). Dairy Queen operated an asset-light model, owning almost none of its stores and collecting a modest royalty of around 4% on franchisee sales. McDonald’s, by contrast, tied up substantial capital in company-operated locations while extracting higher rents and fees from franchisees. Buffett worried that heavy capital expenditures, coupled with domestic market saturation in the United States, would constrain McDonald’s incremental returns on invested capital.

Admiration Without Ownership

Despite walking away from the stock, Buffett never lost his profound respect for McDonald’s as an institution. He continued to visit the drive-thru nearly every morning, famously letting the stock market dictate his order—opting for a $3.17 bacon, egg, and cheese biscuit when markets were up, and a cheaper sausage biscuit when markets were down.

More seriously, Buffett praised McDonald’s corporate culture and its role in society. He once remarked at a major university that McDonald’s had succeeded better as an educator than many higher-education institutions, highlighting how the company instilled work ethic, punctuality, and responsibility in millions of young workers entering the labor force for the first time.

The Takeaway for Investors

Ultimately, the story of Warren Buffett and McDonald’s serves as a powerful reminder that even the world’s greatest investors struggle to distinguish between temporary headwinds and permanent moat erosion. In the late 1990s, McDonald’s was indeed experiencing sluggish domestic growth and fierce price competition. Buffett’s analytical framework correctly identified real challenges in the restaurant industry.

Where Buffett erred—by his own admission—was in underestimating McDonald’s ability to adapt, optimize its franchise model, expand internationally, and leverage its unmatched global brand and real estate to compound wealth over the long run. For everyday investors, Buffett’s “very big mistake” underscores an essential truth: selling a wonderful business because of short-term competitive pressures is often far costlier than holding through the storm.

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