When Warren Buffett makes a stock purchase, it's not just a headline. It's a lesson in investing. The Oracle of Omaha isn't playing darts with the stock market; he's playing chess with a grandmaster's deep understanding of the board and highly practiced eye for game-changing opportunities.
Buffett's game, of course, is value investing. He's on the hunt for companies with strong leadership, consistent earnings, and that secret sauce -- a competitive edge. When he finds one, and it survives his meticulous research into the company's finances, he'll be ready to pounce. Buffett sees a stock market checkmate 10 moves before the rest of us.
Why should you care? Well, Buffett's Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) didn't grow 20.3% annually from 1965 to 2020 by accident. Compared to the S&P 500's 10% in the same period, that's like comparing Magnus Carlsen to an average player at the local library's chess club. It's no contest. Warren Buffett will beat you, me, and the market blindfolded.
So next time you see a headline about Buffett buying a stock, don't just nod and move on. Think of it as a quick tip from a grandmaster investor. Sure, you'll still need to do your research and play to your own strengths, but when he finds a new opening, you should give it a long, hard look. Over time, you will pick up on the patterns that drive his masterful investment ideas.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Now, I'm not saying you should copy every move the Oracle of Omaha makes. What works in his deep pockets may not suit your smaller portfolio. A Buffett buy often lights a fire under the target stock's price, so you won't get the same good deal he identified in the first place.
And many of the stocks he buys are probably far outside your wheelhouse, best left for other investors to consider. For example, you won't see me diving into Warren Buffett's latest bank stock or energy company. Like a dog chasing cars, I wouldn't know what to do with a good idea in these sectors if I caught one.
But Buffett and his Berkshire Hathaway conglomerate own plenty of stocks that I do understand. I may not be a grandmaster of consumer goods and tech sector stocks, but I have a solid opening book and a decent understanding of the tricks and tactics in these markets.
So I'll dig deeper into one of Berkshire's largest, longest-tenured, and best-known holdings. It's safe to say that Warren Buffett loves this company, deeply appreciates the stock's investment value, and won't sell his shares any time soon.
But does this household name make sense for you and me? Well, let's find out.
Coca-Cola: Berkshire owns 9.2% of the company
Berkshire has held 400 million Coca-Cola (KO) shares for decades, and that's not the whole story. Buffett is a noted fan of the company and its products, often nursing a Cherry Coke with his daily cheeseburger. In fact, that particular Coke flavor was declared the official drink of Berkshire Hathaway's annual shareholder meetings in 1986.
Two years later, Berkshire owned so much Coca-Cola stock that Warren Buffett took a seat on the company's board of directors. Berkshire isn't an active buyer of this stock anymore, but has held exactly 400 million Coke shares since 1994.
And Berkshire isn't keeping its investment thesis secret. In the company's latest annual letter to shareholders, Buffett described Coca-Cola's "secret sauce" this way:
The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow.
In other words, this investment is all about the dividends. Armed with a world-class brand name and super-simple business model, Coca-Cola runs a highly effective cash machine and returns a lot of that cash directly to shareholders. Berkshire's effective dividend yield for this stock was a very generous 5.7% in 1994. After nearly 30 years of uninterrupted annual dividend increases and an untouched stock holding, the effective yield on Bershire's original $1.3 billion investment has ballooned to 54%.
Jumping into the Coke pool today isn't quite the same
If I could earn an automatic 54% return on my Coca-Cola investment every year while watching the payouts grow larger and larger over the years, I wouldn't sell a single share either. That being said, I didn't buy this stock in the early 1990s. I was more concerned with graduating from high school and celebrating my home country's bronze medal in the U.S.-hosted FIFA World Cup of Soccer that year.
But fresh cash invested in Coca-Cola today will only see a 3% dividend yield at first. It takes decades to build up the game-changing payouts Berkshire did. I wouldn't trust any dividend stock that promises a fast path to double-digit effective yields. The real secret sauce in Buffett's dividend recipe is time, topped with a ton of unshakeable patience.
"Lethargy bordering on sloth remains the cornerstone of our investment style," Buffett said in the 1990 letter to shareholders. I aspire to live my investing life that way, and Coca-Cola could very well be a great long-term income investment starting from today's relatively affordable share prices, but I prefer opportunities with more business growth in the cards.
Your mileage may vary, but my outlook is pretty clear. I'm impersonating Warren Buffett by neither buying nor selling Coca-Cola stock right now. Call me back if the shares get significantly cheaper for no good reason. I'd rather play for a win than a draw, even if my gambit comes with more risk.
