Looking back at Warren Buffett (Trades, Portfolio)'s career, we can pinpoint a couple of trades that helped him become what he is today.
One of these was his decision to invest in Coca-Cola Co. (KO, Financial) in 1988.
Buffett bought more than $1 billion in Coke shares in 1988, which was then equivalent to 6.2% of the company. The deal didn't look like anything Buffett had done before, and to a certain extent, it wasn't.
Coke was trading at a mid-double-digit price-earnings multiple, and it certainly wasn't a deep-value investment.
However, Buffett could see the value of the brand and the company's long-term growth potential.
It's unlikely he ever would have made this trade if he hadn't stumbled upon See's Candy two decades before.
Buffett, Coke, See's and Blue Chip
The Oracle of Omaha bought the candy company in 1972 for $25 million. According to various accounts of the deal, Buffett was originally put off paying this much for See's, but he was convinced by his partner, Charlie Munger (Trades, Portfolio).
Munger believed that a good business was worth paying for, and he pushed Buffett to do the deal.
The acquisition taught Buffett about the power of brands, and this information helped him develop his investment strategy over the following decades, which ultimately resulted in the acquisition of Coca-Cola. As he said during Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) 2014 annual meeting:
"We made a lot of money in Coca-Cola partly because we bought See's, or at least in my case, bought See's, because I'd understood brands to some degree, but there's nothing like owning one, and sort of seeing the possibilities with it as well as the limitations, to educate yourself about things you might do in the future. And in 1972, we bought See's. And in 1988 we bought Coca-Cola. And I wouldn't be at all surprised, if we had not owned See's, whether we would've owned Coca-Cola later on."
But before Coke and See's, there was Blue Chip Stamps.
Buffett took control of this business in the late 1960s. According to various accounts, value investor Rick Guerin brought the idea to Buffett and Munger, as he thought the company looked cheap.
The stock was a traditional deep-value investment. Customers paid the company to buy its stamps, which they could then redeem at retailers. A portion of these stamps were never redeemed. That provided the company with a large amount of other people's money, with which it could do whatever it pleased.
This is where Buffett saw the value. Acquiring Blue Chips allowed him to buy around $100 million for less than half of its value.
What's incredible about this deal is that Buffett essentially found a great way to leverage his capital without taking on lots of risk.
Blue Chip provided Buffett and Munger, who was the company's executive until it merged with Berkshire several decades later, with capital to acquire new businesses. The first company they bought was See's.
As such, I don't think it's unrealistic to say that without Blue Chip, Buffett and Munger would not have had the success they have had over the past few decades. It seems unlikely they would have gone on to buy See's, and that in turn suggests it's doubtful Buffett would have bought 6.2% of Coke.
What we can learn from this is that when good opportunities present themselves, it makes sense to act quickly and with conviction. These opportunities don't present themselves very often, especially opportunities like Blue Chip. That's why it may make sense to wait for the right opportunity. It takes time and a lot of patience, but as the above example shows, the strategy can produce tremendous results if done right.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Why It Is Sometimes Worth Paying a High Price for a Business
- A Look at One of Baupost's Smallest Equity Holdings
- A Look at Berkshire Hathaway's Smallest Investments
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
