This is the second in a series of weekly posts aimed at establishing a process for becoming a better investor through deliberate practice
, based on suggestions found in Moonwalking with Einstein
. I will post my analysis of the company, as well as a post-mortem of how the investment played out (if we’re studying a historical investment) and the next investment for analysis, next weekend. Please be sure to review why we’re doing this
and my suggestions/instructions
if you’ve yet to do so, and please leave your analysis in the comments of this
post before next weekend if you choose to participate.**** Following up on last week’s analysis of Buffett’s purchase of DQ
, I thought we’d do another of Buffett’s investments this week. In fact, this might be Buffett’s most famous investment of all.
In 1988, Buffett began buying Coke stock like a madman. I’ve seen several quotes saying that analysts thought Buffett was crazy, as the stock had been on a multi-year tear and was trading near all time highs (check this chart out
- the stock had already more than tripled that decade and that excludes their hefty dividend).
But Buffett was undetered and bought 7% of the company in 1988 and 1989… more than $1B worth. That was quite the investment at the time- I believe Berkshire’s market cap was under $10B back then!
So, with all that said, let’s try to see what Buffett saw back then. Here’s Coke’s 1988 annual report
. It includes financials going back all the way to 1978 (see page 34). Using this will allow you to value Coke right in the middle of Buffett’s buying spree.
And, before I let you go, keep in mind that interest rates were much higher at the time- around 9% for ten year government bonds
. That said, the LBO market was relatively new, and banks were allowing PE funds to buy companies with as little as 3-5% equity financing. Given Coke’s strong cash flows and business predictability, it’s not crazy to think that they could have really levered themselves up back then. I don’t say this to influence you one way or the other… I only say it to give some historical context.
Finally, good luck in your analysis. I will post my analysis Saturday and the post mortem and next week’s project on Sunday Please post your analysis in the comments section before then.
The Strategy of Ben Graham – Warren Buffett’s Mentor
From 1923 to 1957 Warren Buffett’s mentor, Ben Graham, followed a strategy of investing in net-nets. He said: “It always seemed, and still seems ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the...net current assets alone…the results should be quite satisfactory. They were so in our experience, for more than 30 years.”
Today net-nets are rare. They are collected under GuruFocus’ Net-Net Screener. GuruFocus also publishes a monthly newsletter which recommends the safest net-nets. All of these are included in GuruFocus Premium Membership.
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