Keeping it simple. That’s how investing legend Warren Buffett became one of the world’s richest men. The oracle of Omaha built his fortune by buying businesses that are easy to understand. Today, his stock portfolio contains some of the best businesses in the world like Coca Cola, IBM and American Express. Meanwhile, he famously avoided Internet stocks during the 1990s dot-com bubble because he didn’t understand them.
As an investor, you might be afraid of missing out or eager to jump on the latest fad stock. But keeping it simple is how Buffett made his fortune. Over the years, Buffet has made money by investing in the world’s best companies and the great news is that we as individual investors can do the same.
The companies Buffett buys have iconic brands, sell their products around the globe, and dominate their industries. They’ve been around for decades and won’t be going away anytime soon. They have high operating margins and strong balance sheet, generate massive returns for shareholders, continue to grow and likely won’t change much in the coming years. Basically they show all the signs of a wonderful business. And best of all, they’re safe and simple.
The above basic principles form the foundation of Buffett’s investing philosophy. After all, he once said, “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
Let’s take Coca-Cola (KO), as an example.
Forbes magazine ranks Coca-Cola as the fourth-most-valuable brand on the planet – behind Apple (AAPL), Alphabet (GOOGL), and Microsoft (MSFT).
Coca-Cola started selling soft drinks in 1886. It still sells soft drinks today. And if we were betting men, we’d wager that it will still be selling soft drinks a century from now.
But the company lost its way in the late 1970s when then-CEO J. Paul Austin decided to put millions of dollars into a stack of unrelated businesses., including shrimp farming and winemaking.The board ultimately got rid of Austin and appointed Roberto Goizueta in the early 1980s to turn things around and focus on Coca-Cola’s core business – selling soft drinks.
Under Goizueta’s watch, the business got back on its feet during the 1980s and this is when Buffett began buying shares. In 1988, he used more than $1.3 billion – roughly half of his stock portfolio – to buy 8% of Coca-Cola’s outstanding shares.
Today, he owns 400 million shares – a little more than 9% of the stock. His stake is now worth almost $17 billion. He earned more than $500 million in dividends from Coca-Cola alone last year. That’s almost half of what he spent to buy the stock initially.
I hope you see the point here.
As I said earlier, Buffett’s philosophy is easy to understand. And it has rewarded him handsomely. He’s worth roughly $65 billion today – which means he’s the fourth-richest person in the world, according to Forbes.
But few investors have the patience to buy these safe and boring businesses like Buffett has done over the past 50-plus years. Most investors just want the next “hot stock” pick that pundits say could double or triple overnight. Buffett doesn’t do that. And neither should you. Investing is not about having fun, but rather it is about making money. And boring safe businesses are the ones to usually throw off tons of cash to investors over long time periods.
When I invest, I want great companies that have a prominent brand or some other quality that allows them to dominate their respective sectors. These companies need to have healthy margins and strong balance sheets, and they look after their shareholders. I call these magic businesses.
As I’ve mentioned before, the secret to long-term wealth is to buy a great business when it is selling at an attractive valuation. And Coca Cola is one of those companies that is at the upper end of fair value today.
Investors are worried about Coca-Colas future.
Investors today are worried about the prospects of Coca Cola stock going forward. They are worried that sugar taxes being implemented in places such as the UK, Portugal and certain US states will derail sales going forward (See AG Barr article for this). They are worried that Coca Cola’s Return on Equity has been reducing over the years. They are worried that profits have only marginally increased over the past few years. They are worried that the stock which acts as a bond proxy will fall in price as interest rates rise.
All the above are causing headwinds in KO stock today. The share price has come down from a high of $46.87 to $41 today – a more than 12% fall. With all this negativity surrounding Coke, now is a good time for an individual investor to buy into this wonderful business.
When a great business comes towards fair value, you need to turn off the noise and place a buy order. Just look at what Warren Buffet had to say about Coca Cola in his 1993 letter to shareholders of Berkshire Hathaway:
Let me add a lesson from history: Coke went public in 1919 at $40 per share. By the end of 1920, the market, coldly re-evaluating Coke’s future prospects, had battered the stock down by more than 50%, to $19.50. At year-end 1993, that single share, with dividends reinvested, was worth more than $2.1 million. As Ben Graham said, ‘In the short-run, the market is a voting machine—reflecting a voter-registration test that requires only money, not intelligence or emotional stability—but in the long-run, the market is a weighing machine.’
When you invest in a business, you need to think like a business owner. If you think in terms of underlying business strength instead of the volatility of stock prices, things are much, much smoother. From 2008 to 2009, Coca Cola stock price fell from $32 to $20. On paper, it looked like you saw a decline of around 40%. This is what scares people, causes them to sell low, and is the perfect strategy if you want to destroy years and years of wealth accumulation in a very short period of time.
If, however, you want to become one of those long-term investors that executes a buy-and-hold strategy that ends up becoming richer even through the passage of recessions and depressions, then I encourage you to focus on business performance. In 2008, Coca-Cola gushed out $1.51 in profits per share. In 2009, the company generated $1.47 in profits per share. We experienced the worst economic catastrophe since The Great Depression, and Coca-Cola’s profits only declined $0.04 per share. That’s practically a rounding error!
And the best part is the company managed to raise its dividend from $0.76 annually to $0.82 annually. This should come as no surprise. If you could go back in time to 2008 and 2009, you would still see people drinking Coca-Cola, Fanta and Sprite. When you sell a well-branded, low-cost product in 207 countries that earns 30% returns on equity, you’re going to make your investors very rich.
There is a reason why Warren Buffett doesn’t touch the 400,000,000 shares of Coca-Cola he acquired in 1988. KO’s profits and dividend ago up year after year. The company has well-protected trademarks, over 500 brands in its portfolio and a distribution network better than any logistics company.
There is a lot you can get out of Buffet’s quote above. Forget price swing when investing. Don’t look at stock market ticker symbols everyday. Instead, find companies that generate high levels of profit even in worse economic conditions, and spend your life acquiring shares of them.
My Purchase of Coca Cola (KO)
Over the past two weeks, my broker was offering free trades in companies listed on the Dow Jones Index. I bought shares in 7 companies in total and Coca Cola was one of them. I will be writing about the other 7 purchases in due course.
I bought 25 shares of KO at an average price of $41. Due to the free trades being offered, I used to buy one or two shares a day. The days the rice went below $41, I bought more shares.
Coca-Cola currently pays $1.45 in dividends. Unfortunately, due to being a non US shareholder, I will have to pay withholding taxes of 15% (LINK) on those dividends. Even with the dividend withholding tax, I expect my 25 shares to generate £23 in dividend every year or £5.75 every three month. This still leaves me with a rather healthy yield of 3%. And the great news is that Coca-Cola has increased its dividend for the past 55 years. So the £23 I will receive in the coming year is just the start of my great relationship with Coca Cola.