Buffett Watch

History Lesson: Warren Buffett's 'Crazy' Coca-Cola Bargain Buy

Coca-Cola bottles are displayed at Andronico's Market in San Francisco, Saturday, July 15, 2006. The Coca-Cola Co., the world's largest beverage maker, reports a 7 percent increase in second-quarter profit on a modest rise in sales. (AP Photo/Jeff Chiu)
Jeff Chiu

There's a long tradition on Wall Street of asking whether Warren Buffett has peaked.  During the Nasdaq run-up around Y2K, he was called "extinct" for staying out of tech stocks because he didn't understand how they made money.  Many investors ignored his warning that an overvalued stock market was heading for trouble.  Even now, you see references to him possibly losing his "edge."

Flashback to 1988, when Buffett bought a lot of Coca-Cola stock, even after it had gained almost 20% a year for eight years.  Joe Ponzio's FWallStreet has an interesting analysis of why Buffett bought Coke even though Wall Street thought "he was downright crazy."  Bottom line: In 1988, Coca-Cola was a "cash cow" with steady shareholder equity growth and an incredibly well-known brand.  Buffett bought shares that were selling at a substantial discount compared to a reasonable valuation of the company and its prospects.  To Ponzio, it was a "no-brainer" investment that has turned a $1 billion purchase into a $10 billion stake generating more than a quarter-billion dollars a year in dividends.

Looking for more lessons from the Oracle?

Thisismoney.co.uk, a website from the publishers of Britain's Daily Mail newspaper, offer a very clear and concise guide on how to "Invest like Warren Buffett."  It neatly summarizes Buffett's views on value investing, and why he looks for companies with good management, a history of strong profits, not too much debt and a "moat."

John Reeves has a similar summary called "Warren Buffett's Priceless Investment Advice" on The Motley Fool.  He gets into some of the "devil in the details" about deciding when to buy after you've identified a target.

Questions?  Comments?  Email me at buffettwatch@cnbc.com

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