Why Did Warren Buffett Invest Heavily in Coca-Cola (KO) in the Late 1980s?

Warren Buffett bought more than $1 billion worth of Coca-Cola (KO) stock in 1988, an amount that was then equivalent to 6.2% of the company. The purchase made it the largest position in Buffett’s Berkshire Hathaway portfolio at the time.

It remains one of Berkshire Hathaway’s largest holdings today. At the end of March 2021, the holding company held a 9.2% stake worth more than $22 billion in the company.

But what prompted chair Berkshire Hathaway to make the purchase at that time, when the stock was still reeling from the stock market crash of 1987? And why did he keep it so long?

Key points to remember

  • Coca-Cola stock was hit hard by the 1987 stock market crash, along with many others.
  • Buffett & Co. determined that it was a good business, had great value, could withstand the competition, and was on the verge of a recovery.
  • Coca-Cola’s involvement marked a significant shift in Buffett’s investment philosophy.
  • Today, Coca-Cola is the third largest operation in Berkshire.

Good deeds sunk by the crash

The stock market crash of 1987 created attractive opportunities for investors as all shares were sold regardless of their fundamentals.

Coca-Cola was an example. It was (and still is) the dominant company in the beverage industry. In 2022, it sells more than 200 beverage brands, from Costa Coffee to vitamin water, in more than 200 countries.

In marketing parlance, Coca-Cola’s iconic name and global reach has created a “gap” around its core soft drink product. A successful brand builds name awareness, the network of distributors and retail relationships that protect it from encroachment by competitors.

warren buffet understood that no competitor was going to appear and take away Coca-Cola market share. On the contrary, over the years the company has steadily absorbed potential competitors and expanded into new trends through purchases such as Ayataka Green Tea and Dasani Water.

An evolving investment philosophy

Buying Coca-Cola suggested that Buffett’s investment philosophy had shifted from Benjamin Graham and the emphasis on finding companies whose value exceeded their market prices.

This adjustment was necessary to take into account the growing size of Buffett’s portfolio, which made it more difficult to exploit market inefficiencies. Its sheer size has also hampered any attempt to active management and reduced the number of opportunities he could consider that would have a significant impact on portfolio performance.

In particular, the influence of Charlie MungerVice President of Berkshire Hathaway Corp., and his philosophy of ethical investment also played a role.

Coca-Cola announced a shift in Buffett’s approach from “buying bad companies at great prices” to “buying great companies at good prices.” By the end of 2020, Buffett’s continued investments in Coca-Cola had returned 1,550%, not including dividends.

Coca-Cola is Berkshire Hathaway’s third largest holding, more than 30 years after it was added to the portfolio.

Buffett’s Top 10 Holdings

Warren Buffett continues to be an investor in Coca-Cola today. The top 10 stocks in Berkshire Hathaway’s equity investment portfolio – by number of shares – based on a November 2020 SEC filing are as follows:

  1. Bank of America (BAC), 1.01 billion
  2. Apple (AAPL), 944.3 million
  3. Coca-Cola (KO), 400 million
  4. Kraft Heinz (KHC), 325.6 million
  5. American Express (AXP), 151.6 million
  6. US Bancorp (USB) 131.9 million
  7. Wells Fargo (WFC), 127.4 million
  8. General Motors (GM), 80 million
  9. Bank of New York Mellon (BK), 72.4 million
  10. SiriusXM (SIRI), 50 million

Warren Buffett: InvestoTrivia Part 1

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