How Warren Buffett Lost $1 Billion


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.

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.

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."

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
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Read/Post Comments (7) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2014, at 10:05 AM, chieftp wrote:

    maybe people no longer want to drink acid flavored with corn syrup.

  • Report this Comment On April 06, 2014, at 10:30 AM, Snoopy2012 wrote:

    And the point of this article is ?

  • Report this Comment On April 06, 2014, at 1:02 PM, deepestvalue wrote:

    Article : 'the reality is, his billion dollar "loss," is simply one that'll be logged on paper only'

    ALONG WITH THE TEN BILLION DOLLARS IN 'PAPER" PROFITS IN THE COMING YEARS.

    The point of this article is to scare people into selling their KO shares.

    The true Buffett followers ( 50,000 of us will be in Omaha this May (first saturday )) will simply order a coke at our favorite restaurant & ask the server: " Are people still ordering coke?". That is all the research one needs to do to hold on to one's coke shares or better still buy more on the cheap thanks to articles like this one.

    Buffett himself would say " Do not worry about the stock price; when it gets silly in either direction, take advantage of it.

    I submit that KO shares are silly low right about now.

    BTW, Buffett teaches that such scary articles will be published time and again in the future as they have been in the past. Just can't predict when they will be published. But we can take advantage of lower prices caused by such articles.

    The sacre mongers say that no one is drinking coke anymore. I would just go to the grocery store parking lots to make sure that people are still loading coke products into their cars. This is all the research you need !!

  • Report this Comment On April 06, 2014, at 4:13 PM, superunature wrote:

    lol really? he bought those cola stock LONG ago for a TINY fraction of what it is today and has been collecting dividends all that time. I'm pretty sure he isn't sweating over this "$1billion" depreciation. This article is absolutely pointless.

  • Report this Comment On April 06, 2014, at 6:02 PM, ethwc wrote:

    Unless he sells the shares at the present price, he has not lost a cent. Likewise, no profit is made on share price increase until sold. Net worth fluctuates but worth is not profit or loss. Since Buffett has made a career of not selling company stock based on rumors and fluctuations but on value, it seems unlikely that he will sell KO soon.

  • Report this Comment On April 07, 2014, at 12:17 AM, Wayners999 wrote:

    Buffet has invested in the popularity of diabetes. What a fool.

  • Report this Comment On April 11, 2014, at 5:44 PM, dbtheonly wrote:

    ethwc,

    Even if Buffett sells the stock, he still hasn't lost anything. Profit & loss is measured against the purchase price.

    One can drive oneself insane worrying about "money lost" by not selling on a particular date or not buying on another date.

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