Warren Buffet is arguably one of the world’s best investors. For the past 50 years, he has amassed returns of 20.8% per annum for the shareholders of his company, Berkshire Hathaway Inc (NYSE: BRK.A). One of Buffett’s most successful investments is The Coca-Cola Co (NYSE: KO). As of 30 June 2017, the company was worth US$17.9 billion at a cost of just US$1.3 billion. This translates to a gain of around 1,277%. Including dividends, the returns would be much higher, considering the Oracle of Omaha first bought the stock in 1988. What is the secret behind such astronomical returns? In…
Warren Buffet is arguably one of the world’s best investors. For the past 50 years, he has amassed returns of 20.8% per annum for the shareholders of his company, Berkshire Hathaway Inc (NYSE: BRK.A).
One of Buffett’s most successful investments is The Coca-Cola Co (NYSE: KO).
As of 30 June 2017, the company was worth US$17.9 billion at a cost of just US$1.3 billion. This translates to a gain of around 1,277%. Including dividends, the returns would be much higher, considering the Oracle of Omaha first bought the stock in 1988.
What is the secret behind such astronomical returns?
In his 1977 Letter to Shareholders, Warren Buffett revealed the following:
“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety.
We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.
We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”
Let’s analyse Coca-Cola based on Warren Buffett’s musings.
Coca-Cola is a simple business. It sells sugary drinks to consumers.
The red can is one of the world’s most pervasive products. When Buffett bought the stock, sales overseas were going off the roof.
The annual report of Coca-Cola in 1988 showed the following:
“In 1988, more than 200 billion servings of our soft drinks were sold worldwide. No other company sold even half as much.
On a competitive basis, our position as the world’s only truly global soft drink company grew stronger. Our market share of the world’s flavored, carbonated soft drink sales, excluding China and the Soviet Union, climbed to nearly 45% – an all-time high – reflecting the talent, diligence and dedication of our Company associates and the people of our worldwide system.”
Buffett also liked the person running the business. His name was Roberto Goizueta.
In Berkshire Hathaway’s 1989 Letter to Shareholders, Warren Buffett said:
“Through a truly rare blend of marketing and financial skills, Roberto has maximized both the growth of his product and the rewards that this growth brings to shareholders.
Normally, the CEO of a consumer products company, drawing on his natural inclinations or experience, will cause either marketing or finance to dominate the business at the expense of the other discipline. With Roberto, the mesh of marketing and finance is perfect and the result is a shareholder’s dream.”
Coca-Cola had a diluted earnings per share of $2.84 in 1988 and was trading at $44.60 then, giving a price-to-earnings ratio of around 16. The valuation was not demanding, considering the exponential growth that it had.
Over the years, the share price of the company had been on a volatile ride. However, Warren Buffett didn’t bail out on the first sight of weakness.
The Foolish Bottomline
Behind every ticker symbol is a living, breathing business.
Our goal as an investor should be to purchase a partial stake in a simple business that is selling at a rational price, whose earnings would be materially higher many years from now, and run by people with competence and integrity.
I think we would do reasonably well if we are disciplined and patient enough to follow the Oracle of Omaha’s “secret”.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.