Why Warren Buffett loves Coke

We have heard it over the years and seen it in his stock picks over the years too. His reasoning has been rather simple when it comes to buying Coca -Cola’s stock but the fact of the matter is that are we sure that Warren Buffett’s really buying coke for that very reason?

Warren Buffett’s romance with coca cola starts way back in 1988 when the company stock traded at a discount which ranged from 24% to 41% with the share price ranging from anywhere between 35$ to 45$.

Everyone at Wall Street was of the opinion that Coke trading at an annual growth rate of 18% was bound to fall and that eventually the stock price would break even and that would be the idle time to pick up the stock. However, Warren Buffett a hardcore fan of Benjamin Graham and an ardent follower of the Security Analysis methodology thought otherwise and took to the stock rather rashly.

Why? It’s because he thought the value on the books was just right.

It was trading below the book value giving a better return than the benchmark index. Moreover, Buffett had seen and felt the product himself that he thought of it as an investment too big too fail. A fast food junkie Buffett has forever treasured a Cherry Coke and till date has a mini fridge in his office stocked with varieties of Coke.

He had seen Coke do what it does best. Advertise and gather clientèle who weren’t going anywhere in the near future. He had seen the tie ups that all the fast food chains had with coke and all the advertisements in the radio, the newspaper and on the television. He estimated the average cost that a coke would cost to produce coupled with the average cost for marketing a coke and estimated that the profits were enormous. The stock would rise eventually. And Buffet thought of Coke as an investment.

When the stock started rising post his initial investments he continued to add it to his portfolio. Today Berkshire Hathaway is a major shareholder at Coke. And Coke in return is one of Berkshire Hathaway’s biggest cash cows.

Did Buffett make this decision out of sheer randomness or did he actually apply cold logic?

The fact of the matter is that he did and to such an extent that it knows no control. Because Buffett had seen the rapport that Coke held with the consumers

He had gone through the surveys where an American would always choose Coke over Pepsi or Rc Cola and at the same time he had seen Coke’s growth in the Asian and European countries. He saw that Coke could breeze through fall backs simply on the basis of it’s other product line up and that coke did not want to steer clear from innovation.

And the rest as they say is history.

And for the record Buffett put in 1.07 billion when he started buying Coke. The dudes at wallstreet thought he was crazy. Crazy he was cause three weeks down his Coke stock was more than the entire value of Berkshire Hathaway’s assets back then!!

This is the first in a series of articles I had earlier written for Doodle. Doodle was a forum that set out to rethink business, economics and finance. It never materialized into what it was actually meant to be and since these articles were lying around I thought might as well recycle them.