The Warren Buffett Way by Robert G. Hagstrom

Author:Robert G. Hagstrom
Language: eng
Format: epub, pdf
Publisher: Wiley
Published: 2013-09-07T16:00:00+00:00

Tenet: Buy at Attractive Prices

In June 1988, the price of Coca-Cola was approximately $10 per share (split adjusted). Over the next 10 months, Buffett acquired 93,400,000 shares, for a total investment of $1.023 billion. His average cost per share was $10.96. At the end of 1989, Coca-Cola represented 35 percent of Berkshire’s common stock portfolio.

From the time Goizueta took control of Coca-Cola in 1980, the company’s stock price had increased every year. In the five years before Buffett purchased his first shares, the average annual gain in share price was 18 percent. The company’s fortunes were so good that Buffett was unable to purchase any shares at distressed prices. Still, he charged ahead. Price, he reminds us, has nothing to do with value.

The stock market’s value of Coca-Cola in 1988 and 1989, during Buffett’s purchase period, averaged $15.1 billion. But by Buffett’s estimation, the intrinsic value of the company was anywhere from $20.7 billion (assuming a 5 percent growth in owner earnings) to $32.4 billion (assuming 10 percent growth), or $38.1 billion (assuming 12 percent growth), or $48.3 billion (assuming 15 percent growth). Buffett’s margin of safety—the discount to intrinsic value—could be as low as a conservative 27 percent or as high as 70 percent.

The best business to own, says Buffett, is one that, over a long period of time, can employ ever-larger amounts of capital at sustainably high rates of return. In Buffett’s mind, this was the perfect description of Coca-Cola. Ten years after Berkshire began investing in Coca-Cola, the market value of the company had grown from $25.8 billion to $143 billion. Over that time period, the company produced $26.9 billion in profits, paid out $10.5 billion in dividends to shareholders, and retained $16.4 billion for reinvestment. For every dollar the company retained, it created $7.20 in market value. At year-end 1999, Berkshire’s original $1.023 billion investment in Coca-Cola was worth $11.6 billion. The same amount invested in the S&P 500 index would have been worth $3 billion.

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