Billionaire_Bunny: Why Did Warren Buffett Invest Heavily in Coca-Cola in the Late 1980s?

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Tuesday, November 17, 2020

Why Did Warren Buffett Invest Heavily in Coca-Cola in the Late 1980s?

I have been a fan of Warren Buffett since the beginning of my investment journey. I knew about Warren Buffett from my older brother, Peter Bun. My brother was the one that introduces Warren Buffett to me. Warren Buffett was someone I idolized. I was amazed by his investment skills that led him to become the world's legendary stock investor. He was not only one of the wealthiest people in the world but also a great teacher. Warren Buffett wasn't stingy about his investment techniques and liked to share how he did it to the public.
 
His success made me interested in following his teachings and the advice he tells the public. I like how Warren Buffett picks his investment. He always chooses companies that are very easy to understand but has a great business. One of the most significant investments that led him to become wealthy was Coca-Cola Inc. (Ticker: KO). This purchase was made back in the 1980s and was one of his top holding in Berkshire Hathaway's portfolio. He bought more than $1 billion of Coca-Cola Inc. shares in 1988, equivalent to 6.2% of the company. This turned out to be one of Berkshire's most lucrative investments.
 
Even today, Warren Buffett still holds Coca-Cola Inc. stocks in the Berkshire Hathaway portfolio. He didn't sell it and planned to hold it for a long time. Coca-Cola Inc.'s stock price has increased in value since his purchase in the 1980s. Warren Buffett had become wealthy because of making this smart investment pick. Because of this success, it made me curious about why he decided to invest in Coca-Cola Inc. in 1987. I decided to research as to why he did it and how I can use this as an example for my next investment purchase. I will explain why Warren Buffett decided to invest most of Berkshire Hathaway's cash balance in Coca-Cola Inc in this post. This post content will demonstrate and teach you guys how we can replicate Warren Buffett's investment ideology. 
 
What Happen in 1987?
The stock market crash of 1987 was a rapid and severe downturn in U.S. stock prices over several days in late October 1987. The crash originated in the United States; however, the event impacted every other major stock market in the world. Many investors decided to dump the shares, fearing that the stock price might decline much further.
 
Warren Buffett was not afraid of what's happening in the stock market during that time. He loves it when the stock market crash since he can accumulate more shares of companies he likes. During that tragic moment, Warren Buffett made one of the greatest investments in his investment career by purchasing Coca-Cola Inc. (Ticker: KO). His purchase has made Coca-Cola Inc. the largest position in his portfolio at that time. 
 
At that time, Wall Street thought Buffett was insane. In 1987, earnings were down nearly 2% from their 1986 peak, which is not the sign of a growing company. However, people who criticize him were wrong, and Buffett's Coca-Cola Inc.'s investment grew exponentially since the purchase.
 
I am always impressed with Warren Buffett's great investment skills. I learned that people shouldn't fear the stock market during turmoil and instead use it to your advantage to purchase quality companies at a discounted price. Learning this investment tip made me not afraid of the stock market crash, and used the time to acquire high-quality stocks at great valuation.
 
I had experienced many stock market corrections and crashes during my investment journey. And learning this valuable investment tip from Warren Buffett had made me to also invest during bad times. From this lesson, I purchased great companies at a discounted price when the market is terrible. Because of this, I was able to profit from my stock investment by buying at low prices.
 
Similar to Warren Buffett, I also don't tend to sell my stock positions often. I always hold the stocks in my portfolio long term and take advantage of the dividends payout to purchase more shares in stocks on my wish list. Since the year 2015, when my brother and I decided to split the portfolio and manage it independently, I made my stock portfolio increase in value. During the split (October 2015), my portfolio value was at around $400,000. My portfolio is now valued at $850,000 (November 2015), increasing a few hundred thousand dollars from 2015 inception.
 
If I didn't learn this valuable lesson from Warren Buffet, I wouldn't have been able to have the portfolio I have right now. This lesson is valuable and important because many investors made mistakes in selling stocks at the low and buying them at high. I am always investing when the market drops and seeks great companies to add to my portfolio holding.


So Why Did Warren Buffett Invest In Coca-Cola Inc.?
Aside from great timing investing in the stock market, Warren Buffett also has other investment reasoning as to why he purchase Coca-Cola Inc. People on Wall Street, and other outsiders were shocked as to why Warren Buffett invested in that company. They were used to seeing Buffett buying cheap media and industrial stocks in the 1970s.
 
In Buffett's 1988 letter to shareholders, he addressed his investment in Coke for the time, and in doing so, expressed his fundamental approach of buying great companies and holding for the long haul. Warren Buffett was influenced by his business partner and close friend, Charlie Munger, to invest in a cheap stock at a bargain and invest in high-quality stocks at a fair price.
 
One of the reasons Buffett decided to buy Coke in 1988 was that the brand had a lot of potentials to grow overseas, and it was trading at a modest valuation, with a price-to-earnings ratio of about 15 times. From 1989 through 1999, Coke's earnings per share grew at a compound rate of 12% per year.
Buffett's investment in Coca-Cola Inc. shows that you don't have to be a Math Wiz or have a high IQ to build wealth with stocks. You need to find a great company that has much potential to grow.
 
Warren had spent decades analyzing Coke before his purchase in 1987. He had always had this stock on his watch list and waiting for the perfect time (market crash) to purchase it for his investment portfolio. In his shareholder letter, he mentioned that Coke's brand had always caught his attention since he was young. He believes that Coke has a strong brand that no other company can replicate. People who drink Coke are unlikely to switch to another soda brand even if they are priced at a much lower price.
 
Warren Buffett made this investment pick had taught me things in many ways. First, I learned that you don't have to buy stocks at a low price to profit, and picking an outstanding stock at a fair price can be more profitable in the long run.
 
I had made many investment mistakes since I started managing my portfolio. For instance, there is some investment I made that went down in value. I was trying to purchase bargains at that time, but that made me lose money instead. I learned that investing in a stock because of cheap valuation doesn't guarantee that my investment will be excellent.
 
Warren Buffett's investment pick in Coca-Cola Inc. in 1987 made me become an investor that not only looks for bargain valuation but a great company with a robust business model and has much room to keep growing. If I had learned this earlier in my investment career, my portfolio had probably performed better than right now. But it's OK to make mistakes; this lesson of Warren Buffett's investment in Coca-Cola Inc. should be a lesson for you guys to learn.
 
If you can make great reasoning similar to Warren Buffett when picking a stock, you guys can also be successful in investing. I'm always looking at the quality of the stock before purchasing it for investment now. This crucial lesson can prevent me from choosing companies with a lousy business model but trading at a bargain price. The quality of the company is an essential point you have to consider before investing. I had made many losses because I picked lousy companies at a bargain price to my portfolio. These investment mistakes had become a tremendously important lesson for me. Thus, I am now looking at the quality of the company business at not just price alone. 


Long-Term Investment Horizon.
Buffett has rarely transacted in Coke stock since 1989. He added more shares of Coca-Cola Inc. in 1994, bringing its ownership to 100 million shares. He didn't sell his Coke position from his portfolio even though he had made a profit.
 
When Warren Buffett invested in Coca-Cola Inc., he had no plan of selling the stock in the future. He wanted to hold this stock in his portfolio for a very long time. Even till now, Berkshire Hathaway still has Coca-Cola Inc. as one of the largest positions. It remains one of Warren Buffett's largest holding now.

Warren Buffett had made great returns from his Coca-Cola Inc. investment pick in 1987. This investment had made Warren Buffett wealthy, and he was able to use the dividends paid from Coke to be reinvested in companies he likes. Warren Buffett's decision to keep great companies for the long haul has made me learn not to sell stocks too quickly.
 
I always tried to sell individual stocks after I made some profit, however seeing how Warren Buffett invest made me learn to hold stocks for the long term. I made great returns from my investment that I decided to hold in the long haul. For example, Apple Inc. (Ticker: AAPL) is one of my stock pick for my portfolio. I had multiplied my investment from investing in Apple Inc. Apple Inc. was a company that was also bought by Warren Buffett in a mass.
 
I didn't purchase a lot of Apple Inc. stock since I was looking for a bargain in the stock market. I wasn't aware of the long-term gain potential and wasn't seeing the bigger picture. If I had seen Apple Inc., similar to Warren Buffett's investment purchase of Coca-Cola Inc., I probably had made more money from that investment. I wish I had invested more of my money in this company, but this will be an essential lesson for me in the future. 


Fair Valuation for a Great Business.
When Buffett purchased Coca-Cola Inc., the market value of the company was $14.8 billion. This indicates that Warren Buffett had overpaid for the company. Many people were confused about this investment made by Warren Buffett and felt that Warren had overpaid for this investment. So where exactly is the hidden secret to Warren valuing Coca-Cola Inc.?
 
Assuming the company could continue to grow Free Cash Flow at 21.8% a year for ten years, and then slowed to 5% after that and assuming Buffett wanted a 15% or more average annual return, you could value Coca-Cola at $22.3 billion or $59.16 a share in 1988. Coca-Cola Inc. was trading between $35 and $45 in 1987. From the calculation, Warren was getting a 25% margin of safety from the market price. 
Today, Buffett's stock in Coca-Cola is worth more than $10 billion, and he collects more than $270 million a year in dividends. Not bad, considering how easy it was to find the value in this "no-brainer" investment.
 
From this lesson, I learn that it's OK to purchase great companies at a fair valuation. You don't have to keep chasing for a bargain all the time, since a great company at a reasonable price can perform very well also. I learn from Buffett's Coke investment to look at the quality of the business. A great business can perform well decades ahead, and it will be a lucrative investment in your portfolio. 

 
Conclusion
In conclusion, we now know the reason behind Warren Buffett's significant investment in Coca-Cola Inc. in 1987. Warren Buffett wasn't afraid of the market crash during that time, and he used it to his advantage by investing more of his money into a great company. Coca-Cola Inc. became one of the largest investments for Berkshire Hathaway during that time. Warren acquired more than $1 billion of Coca-Cola Inc. stock, and many people think he was crazy for paying such a high price. 
 
At that time, Wall Street said Coca-Cola Inc. was an insufficient stock to buy; however, Warren Buffett thinks it was a fantastic business to own. Even when Warren Buffett is not getting a bargain for Coca-Cola Inc. shares, this investment became one of Buffett's most lucrative investments. 
 
I hope you guys can learn that you don't have to always look for a bargain in stocks. By simply investing in high-quality, great companies at a fair price can let you have an outstanding performance in your portfolio. This lesson taught me to be a better investor when picking stocks in the future. I hope I can learn and apply to this lesson so that my portfolio can do better. Remember to use this valuable lesson about how Warren Buffett invests in Coca-Cola Inc. This lesson can help you make a better investment decision in the future and become just like Warren Buffett. 

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