Investing Based on a Company’s Net Income is Probably Not the Best Idea
It’s earnings season again, which means you are probably staring at a company or two in your portfolio that have seen their share price take a dive after reporting “disappointing” earnings.
You are not alone.
Here was the news the other morning after Warren Buffett’s Berkshire Hathaway reported earnings:
Sounds bad right? Profit (Net Income) is down by a sizeable margin year over year for Berkshire.
Does this mean it is time to say goodbye to the all-star investor?
From those headlines it may seem so. But there is a lot more to a company’s financials than that headline earnings number. (Read to the end and find out how Buffett really measures the success of his businesses.) [continue reading…]
Throwback Thursday: A look at Buffett’s 1988 investment in Coca-Cola
Buffett began purchasing Coca-Cola (Ticker: KO) shares in 1988. Today, Buffett has over $13 billion in gains from his investments in Coca-Cola alone.
With hindsight, it is always easy to say Buffett’s investment in Coca-Cola was anything short of genius, but at the time Coca-Cola was facing concerns over maintaining market share and its ability to grow.
However, Buffett recognized that Coca-Cola had a strong brand name, very consistent history of earnings, shareholder return and low debt. It has been a wild 26 year ride for Buffett, but the returns have been staggering!
At the time of Buffett’s initial purchase of Coca-Cola shares, its market cap was about $18.5 billion. Coca-Cola then had Revenues of $8.3 billion, a cash pile of $1.2 billion, a net income of about $1 billion and about $4.4 billion in retained earnings.
Buffett purchased about $1.3 billion in Coca-Cola initially, or about 7% of the company. Today his total Coca-Cola stake is worth over $15 billion, and pays him about $490 million in dividends each year! Incredible returns off of a $1.3 billion initial investment!
But its always easy to quickly glance over the last 26 years. The truth is that it took some major cahones to hold anything over the last 26 years.
Would you have been able to overlook the short term negative outlook for Coca-Cola in 1988?
Would you have had the confidence to hold through a 50%+ drop from its 1998 highs to 2004 lows? Or weather the 2008 decline?
Here are some of the numbers from their late 70’s and 80’s annual reports: [continue reading…]
