Warren Buffett is all about long-term wealth-building. Short-term trading may be the more exciting method of investing, but buying and holding for the long haul is the better way to build sustainable riches. Once you've done your due diligence, buying and holding a security despite market volatility gives you the best chance of earning respectable gains, versus trying to time the market.
Source: Coca-Cola Company.
Warren Buffett and Coca-Cola
Investors fail to hold on to their securities for many reasons, the biggest two being their inability to stomach market risk and their tendency to heed short-term market predictions. When a security's price declines a considerable amount, or when financial experts warn of a market dip, the average investor's instinct is to sell, cut their losses, and run for the hills.
Few have the wisdom of the great Warren Buffett. His ability to stay calm, ignore the noise, and hold on to his investments in the most treacherous market conditions is both rare and highly rewarding. When Buffett first purchased shares of Coca-Cola (KO 0.63%) in 1988, many Wall Street analysts disagreed with the move. Coke's earnings were sliding, and it was losing substantial market share to its competitors. In hindsight, Buffett's investment in Coca-Cola was a great move. With 42% percent market share today, Coke has established itself as one of the most dominant companies in the world and has earned Buffett over $10 billion in unrealized gains.
Coca-Cola is still a winner
Buffett understands the benefits of long-term investing better than anyone. Once he recognized the long-term growth potential of Coke, he decided to rely on time and compounding to generate earnings -- and it's working brilliantly, for the most part. Coke had a strong run from 1988-1998 (with share prices peaking at $88) and is still a good investment. Since 2009 -- the year that Coke revealed its 2020 vision, a long-term growth initiative that includes doubling its 2010 revenue by 2020 -- revenue has increased by 51%, and operating income has increased by 23%. Although revenue declined by 2% in 2013, management still believes the company is on track to achieve its 2020 vision goals. Further, despite the fact that soda consumption in the U.S. is declining, Coke continues to sustain and drive growth with its incomparable business model. Coke has an unrivaled distribution network that spans 200 countries and allows the company to generate 80% of its earnings outside the U.S. Furthermore, because Coke also offers healthier beverage choices (e.g., juices, teas, and sports drinks) it can capitalize on the current trend of Americans' increasing health-consciousness. Due to all of these factors, I believe Coke stock still makes a great investment today..
My foolish conclusion
So what lessons can a new, inexperienced investor learn from Buffett's investment practices over the years? Once you find a company like Coca-Cola -- one with a solid business model, competitive advantages, growth prospects, and strong management -- invest and hold until you're old -- or at least for 10 years. Give the market and the magic of compounding an opportunity to generate substantial earnings. Disregard short-term market predictions and the urge to make quick profits. Don't allow greed and impatience to become the foundation of your investment decisions. Follow in Buffett's footsteps and hold on to securities for as long as possible.
