How Warren Buffett Lost $1 Billion

Berkshire Hathaway owned more than $100 billion worth of company's stock, but one firm had a tough start to 2014, which resulted in a big loss on paper.

Apr 5, 2014 at 12:30PM

Buffett By Coca Cola
Source: Coca-Cola. 

With the first quarter of 2014 officially closed, one stock in the portfolio of Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) sunk the value by $1 billion. And which one it is will surprise you.

By Bev Goodwin

Source: Flickr / Bev Goodwin.

The one tough start to 2014
Coca-Cola (NYSE:KO) watched its stock price dip 6.4% through the first three months of 2014, and when you consider Buffett has a 400 million shares which were worth $16.5 billion at the beginning of the year, that drop means the position is now worth a staggering $1.1 billion less.

The sales volume at the beloved drink firm fell below analyst expectations when it announced earnings in the middle of February. With the questions swirling surrounding the future success of soft-drinks as Americans and individuals everywhere become more health conscious, many have begun to question the lasting value of Coca-Cola. 

What the market is missing
Buffett once said he has "to stick with what I really think I can understand," and troublingly, it seems as though many people have lost sight of the true reality of Coke.

Many people forget Coca-Cola is willing to expand within its circle of competence, beverages, but outside of its own core products. It acquired Vitaminwater for $4.2 billion in 2007, and in February it announced it has taken a 10% stake in the popular Green Mountain Coffee, for $1.25 billion which sent Green Mountain stock soaring up 25%. All of this is to say nothing of its smaller -- but likely pivotal -- brands like Simply and Honest Tea.

By Leo Hidalgo

Source: Flickr / Leo Hidalgo.

In addition, few people realize the willingness of Coca-Cola to return its earnings to its shareholders. In 2013, it reported a net income of $8.6 billion, and it sent $8.5 billion back to its shareholders through dividends and share repurchases.

This is part of the reason why its adjusted earnings per share -- excluding currency and other impacts -- was up 8% even despite its net income falling by 5%. 

Buffett himself noted as a result of its buybacks, the total ownership of Coca-Cola by Berkshire Hathaway rose from 8.9% to 9.1%. While that may not sound significant, he highlighted "if you think tenths of a percent aren't important, ponder this math: For the four companies [Wells Fargo, American Express, Coca-Cola, and IBM] 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." 

All of this is to say, Buffett isn't deterred by the ability of Coke to generate remarkable returns to those who own it, even despite growth that "misses expectations."

By Astanita

Source: Flickr / astanita.

Buffett is undeterred
As mentioned earlier, the position's value shrunk and is now worth over $15 billion. But Berkshire Hathaway only paid $1.3 billion for these shares -- meaning Buffett and team are still well in the green when it comes to Coca-Cola.

And when you consider a year ago Buffett remarked "We've never sold a share of Coca-Cola stock, and I wouldn't think of selling a share," the reality is, his billion dollar "loss," is simply one that'll be logged on paper only.

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing in wonderful companies like Coca-Cola. But the thing is, he wants you to be able to invest just like him. Through the years, Buffett has freely offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

 

Patrick Morris owns shares of Berkshire Hathaway and Coca-Cola. The Motley Fool recommends Berkshire Hathaway and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway and Coca-Cola and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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