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Self Examination and a Little Coke

March 10, 2014 | About:
David Chulak

David Chulak

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For a period of more years than I would care to admit, I’ve been fortunate to continually add to my collection of investment books, including the ever required reading of the classics, "Security Analysis" of Graham and Dodd fame, "The Intelligent Investor" by Benjamin Graham, "Margin of Safety" by Seth Klarman (Trades, Portfolio) and many others. Of all of the books mentioned in this article, these are among my favorites, and I can safely recommend them to all investors. They should all be included in your library as prized possessions.

Most recently, I found myself re-reading a great book on Warren Buffett (Trades, Portfolio)’s investment strategy called "The Essential Buffett" by Robert G. Hagstrom. Hagstrom concludes his book with a final chapter entitled, “Learning From the Best.” He explains that Buffett worked around some of the best investors in the past and had also learned extensively by reading from some of the other greats. Says Buffett:

“Certainly, I talk about reading Graham. I’ve read Phil Fisher. So I’ve gotten a lot of ideas myself from reading. You can learn from other people. In fact, I think if you learn basically from other people, you don’t have to get too many ideas on your own. You can just apply the best of what you see.”

Also from Buffett:

“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction”.

This got me thinking about how the ordinary investor endeavors to emulate the best of the best. This is why investors seek out ideas from the Buffetts, Gabellis, Klarmans and other greats that have staked out positions in an equity of their choice. After all, many of us conclude that if it’s good enough for them, it should also be good for my portfolio. Certainly, this is often true. Most recognize that even the greats have turkeys.

In the latest annual letter to shareholders for Berkshire Hathaway (BRK.A)(BRK.B):

Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of Wells Fargo (increasing our ownership to 9.2% versus 8.7% at yearend 2012) and IBM (6.3% versus 6.0%). Meanwhile, stock repurchases at Coca-Cola and American Express raised our percentage ownership. Our equity in Coca-Cola grew from 8.9% to 9.1% and our interest in American Express from 13.7% to 14.2%. And, if you think tenths of a percent aren’t important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a percent in our share of their equity raises Berkshire’s share of their annual earnings by $50 million.

Reasonable people would assume that choosing these four stocks alone should provide a relatively safe portfolio. Considering the percentage that Buffett’s Berkshire Hathaway has purchased of each, how can you go wrong? The partial list of investing gurus below should give anyone reason to consider investing in Coca-Cola (KO).

A big question is whether you can make a decision to invest in Coca-Cola (KO) or the other three purchases (IBM, WFC and AXP) mentioned above independent of these investors. If none of these investors owned the stock, would you still buy it today if your own research told you it was a buy? This is an important question that we must each ask ourselves. Do we place too much emphasis on what they own? Does the fact that the equity we are researching is owned by our favorite investing guru give us the absolute assurance that we seek before investing our money? If there were only one currently holding, or two, or three gurus, would that change our decision at all? I suggest it should not, but we should question ourselves each time.

Let us assume that you are purchasing Coca-Cola and steadily building your position. After all, Buffett is holding 400,000,000 shares.

Then let us ask one more question. What would you do the day that Warren Buffett (Trades, Portfolio) decided to sell some of his shares of Coca Cola (KO) or IBM, Wells Fargo and others? How will the market react the day Warren Buffett (Trades, Portfolio) decides to sell some of the shares? Crazy you say: He will never sell his shares of Coke. We do not know that. The regulators in this country which nearly resemble the European model may decide that our intake of sugary drinks needs to be highly regulated which could take a toll on the industry.

He will not be around forever and those trying to fill his shoes may decide that a better investment opportunity exists with some of that money. He may decide that himself. It may never happen, but we are examining our own methodology of investing. I’m guessing that the stock may take a major hit depending on the amount of shares sold. Let us suppose that the market suddenly decides that due to the decision of Buffett, the shares are suddenly worth one half of today’s value. Assuming that the drop was not due to regulatory issues and the only fact you receive is that he has sold one half of his shares and the stock is now selling for approximately $19, would you sell also, or would you back up the truck and load up with shares?

This is really an exercise in knowing your own mind and knowing your own stocks. Of course it helps each of us to see what the greats are purchasing. It is a great starting point of reference for researching potential investment opportunities. It’s better to fully understand the company and see what they see.

It wasn’t that long ago that I had invested contrary to Buffett’s position on IBM and held a short position. That, perhaps, may have been one of the most difficult decisions I’ve made. Then I realized, I was second guessing myself just because he owned it. I was certain or as certain as one can be that IBM (IBM) would take a hit.

Many of us use checklists and you would be foolish not to examine what great investors were currently purchasing, using it to your advantage. With that said, my own checklist has the following questions:

  1. Am I buying or placing too much emphasis on the fact that a favorite guru is buying?
  2. Would I continue to buy more and/or hold if the guru sold his shares?
  3. Assuming some of the gurus have sold off shares and the price goes down, will I panic or am I assured that the decision I’ve made is still the correct one?
  4. Assuming some of the gurus have sold off shares and the price goes up, is that assurance that my decision is and was correct or should I take the opportunity to reexamine?

Disclosure: Long KO, IBM and WFC

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

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