The key to Warren Buffett (Trades, Portfolio)'s success over the past six decades is not his stock-picking skills. While it is true that this has helped and was certainly essential, even the best stock pickers couldn't achieve the record he has without the long-term investment mentality embedded in the Oracle of Omaha's philosophy.
A great example is the case study of Coca-Cola (KO, Financial). This is perhaps Buffett's best-known investment. Buffett bought more than $1 billion in Coca-Cola shares in 1988, an amount that was then equivalent to 6.2% of the company.
He started buying the shares not long after the famous black Monday stock market crash in 1987. He added some more shares in the early 1990s, and today the overall holding is worth $21.4 billion.
Along for the ride
Buffett first mentioned his Coca-Cola investment in his 1988 letter to investors. He wrote:
"We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint...
"Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds."
That was 33 years ago. Holding onto the stock since the first acquisition has required immense patience.
Buffett could have sold in 1999, and if he had, he would have doubled his money in just two years. Considering Berkshire had around 20% of its capital invested in this one position, that would have been a fantastic performance.
By 1992, the stock traded as high as $11 (split-adjusted), up from the 1987 level of around $2.50. Buffett could have sold then for a 340% return in five years. For most investors, this would have been incredibly tempting, especially when the stock traded sideways between 1992 and 1994.
However, between 1994 and the middle of 1998, shares in Coca-Cola charged higher. The stock hit a then all-time high of $43 in the middle of 1998. Based on comments he made at the time, it's clear Buffett thought the market was overvalued at this point. He could have sold the position and earned an incredibly desirable return. Instead, the Oracle continued to hold.
When the dot-com bubble burst, Coca-Cola stock started to slide. It then traded in a range of between $30 and $20 until around the end of 2010.
Buffett could have sold his position in the company at any point during this period, and he still would have earned a market-beating return, including dividends. Once again, he continued to hold.
Double-digit return
Buffett invested an initial $1.3 billion in Coca-Cola. That investment has grown at a compound annual growth rate of 8.9% over the past 33 years, excluding dividends. Including dividends, I estimate the return is somewhere in the 11% to 12% range.
This example clearly illustrates the benefits of long-term investing and Buffett's best quality. Over the years, there were many opportunities to sell, but he didn't. As a result, he has benefited from higher returns and avoided additional tax charges. Holding onto such a high-quality investment has also reduced the risk that he will make a mistake.
Investing is hard, and even the Oracle makes mistakes. For example, if he'd sold Coca-Cola, he might have put the money into another business, which may have gone to struggle. Therefore, not only would he have to pay a tax charge, but he would lose money on the subsequent investment as well.
Investors can learn a lot from this approach. It might be tempting to take profits on a highly profitable position, but investing is a marathon, not a sprint. Just because you've found one good investment does not necessarily mean another one will come along. Good businesses are few and far between.
Disclosure: The author owns no share mentioned.
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