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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