It just seems counterintuitive that the greatest investor of all time, Warren Buffett, could make the bulk of his fortune with just a few decisions to purchase companies without a real exit strategy. It just sounds too simple.
We’ve seen Buffett’s defense of inactivity in trading stocks and it sounds almost trite:
“The idle rich get a bad rap: it’s actually a heck of an investment strategy”.
Another Buffettism: “You don’t get paid for activity, just for being right”.
I suggest for Buffett and his investment vehicle, Berkshire Hathaway; The Coca-Cola Company (NYSE:KO) is the definition of “being right.” And Coke is making the idle rich—even wealthier.
Buffett concurs with Peter Lynch’s term “diworsification” when it comes to diversifying a portfolio: you create alpha when you KNOW you’re right and have the conviction to invest heavily in 1–or just a few ideas.
In 1988, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) had $550 million in pretax operating earnings. That year Berkshire Hathaway began to purchase more than twice that amount, $1.3 billion, in 1 stock: the Coca-Cola Company. I recall analysts saying Buffett had lost it as an investor, that Berkshire Hathaway was simply a non-dividend paying proxy for Coca-Cola, and that Berkshire was doomed to mediocre future prospects. Clearly its growth years were in the rear view mirror.
In 1988, Berkshire stock sold for $6,000/share. Today it’s over $150,000.
So Coke’s decision to raise its dividend 10% this week was probably greeted by a smile in Omaha, if not a yawn.
**Coke has paid dividends for 93 consecutive years
**Coke has raised its dividend 51 consecutive years
**Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) earns a 34% yield on its original Coca-Cola investment
That’s because Coke has paid a dividend each year since 1920, and raised the dividend each of the past 51 years.
Buffett today earns an annual dividend yield of 34% on his original Coke investment: $448 million per year.
About every 2 1/2 years Coke returns Buffett’s original investment back to him in cash. Again, and again, and again…
It’s Never Easy Buying Coke Because It’s Rarely Cheap
It took courage for Buffett to bet the ranch on a single stock. Especially for a value investor “paying up” at no discount to the general market. It’s never easy buying Coke. There are still many reasons not to invest in it today: It sells for a hefty 19 times trailing earnings, 16 times cash flow, and 5 times book value. Coca-Cola’s products are under full attack in developed markets–with momentum for “sugar taxes” on soft drinks, even limits on soda sizes proposed by New York City Mayor Bloomberg. The truth is Coke is never cheap, nor easy, for a value investor to buy. But Coke represents Buffett’s original adoption of partner Charlie Munger’s advice: sometimes you need to “pay up” for truly extraordinary businesses. I believe the Coke investment represented a significant philosophical evolution for Buffett: from an absolute value/cigar butt investor to a value investor who assigned significant worth to off balance sheet assets, most notably the power of global franchises.