To The Moon

$Coca-Cola(KO)$ : Don't care about stock price, focus on its business

Initial investment date: 1988

Liquidation date: Still holding

Annualized Rate of Return: 24%

Data as of 2018

Coca-Cola is arguably Warren Buffett's representative investment. Buffett claims to drink 5 to 6 cans of Coke a day, accounting for 1/4 of his daily caloric intake. So he once said: Coca-Cola consists 1/4 of me.

After several stock splits of Coca Cola, Berkshire has never sold any of its 400 million shares.

From Berkshire's investment in Coca-Cola, we can learned that Warren Buffett's philosophy of "investing in great companies at a reasonable price" outweighed "investing in mediocre companies at a great price".

When he bought Coca-Cola, its valuation was hardly cheap. Coca-Cola's PE ratio was around 15-19x, higher than the industry average.

• Why did Buffett invest in $(KO)$?

Buffett valued Coke's company's moat and global market reach. The 1987 stock market crash also provided a buying opportunity.

Here we can see that after Graham's and Munger's influence, Buffett's philosophy came into shape -  "buying good business at the right price".

After Buffett bought $(KO)$, Coca-Cola's valuation and earnings doubled throughout 1990s, with the stock price rising nearly 18x in a decade.

However, the two decades between 1998 and 2018, Coca-Cola's share price experienced a recovery after the cut. Compared to 1998, its growth was little. Some people call it the "lost two decades".

And my point is, don't just look at the stock price. Coke brings a lot of dividends to Berkshire.

Coca-Cola is one of the few companies that has increased its dividend every year for the past fifty years, from $0.075 per year in 1988 to $1.48 per year in 2017 and $1.56 in 2018. In 2017, Berkshire got $592 million in cash dividends from Coca-Cola, accounting for 45% of the principal.

$Apple(AAPL)$ : The Senior Keeps Learning $(AAPL)$

Initial investment date: 2016

Liquidation date: Still holding

Annualized Rate of Return: 17% (Data as of 2018)

It's known that Warren Buffett doesn't like tech stocks - he seeks more certain returns than investments with high risks.

But $IBM(IBM)$ and $Apple(AAPL)$  accounted for a large part of his portfolio.

The reason of Berkshire's investment in Apple is also very clear:

1. Buffett believes that Apple's products are already indispensible to daily life, which is the embodiment of company's moat.
2. Apple has extremely strong profitability.

One of Warren Buffett's favorite metrics is ROE.  Apple's ROE has remained at 35%-45% in recent years, and the PE is in a reasonable range.

In addition, Berkshire has been facing a happy problem. There aren't enough quality investment opportunities to put its bountiful cash.

The investment in Apple solves this problem.

I highlighted some of the changes in Buffett's investment philosophy: from Graham to Munger to the Buffett philosophy, from skepticism of tech stocks to embrace of tech stocks. 

Buffett, in his 90s, is still learning.

One of the lessons I can learn from Buffett's investment in Apple is that anyone should be humble and keep learning in the face of a changing world. And Warren Buffett is very humble.

Someone asked, "What kept you from investing in Amazon?" -- "Because of stupidity."

SANBORN: The Fangs of Warren Buffett's Youth

Initial investment date: 1959

Liquidation date: 1960

Annualized Rate of Return: 50%

This early investment was not as well known as others. But it palyed an important role in his investment history.

The young Warren Buffett, then a believer in Graham's value investing philosophy, made a series of active investments.

Sanborn Map's main business was extremely precise, detailed, and informative map products. The company's main customers - such as fire insurance companies - desperately needed this information to measure underwriting risk.

Sanborn Maps captured a lot of financial benefit from in its early years and was virtually immune to economic cycles and did not require significant capital investment.

With so much money, the company used its idle funds for investment and gradually built up a sizable portfolio.

While the company's main business declined in the next two decades, Sanborn's stock fell from $110 to $45 from 1938 to 1958. The reason for the discounted stock price was the market's distrust of management - who was not interested in business due to the huge investment returns.

Meanwhile, the value of Sanborn's portfolio rose from $20 per share to $65 per share.

Buffett's deemed it as a good opportunity because the stock price of $45 was lower that the company's portfolio $65 and the company map business is still profitable.

Buffett joined the board and together with other major shareholders to give management pressure. The Buffett coalition ended up with 44% of the shares in the company.

This active investment brought 50% profit for the Buffett Associates, which was very significant for the infant Buffett empire.

$American Express(AXP)$ : A Small Tumor Presents a Good Opportunity

Initial investment date:1963

Liquidation date:Still holding

Annualized Rate of Return: 12%

Data as of 2018

The story of Warren Buffett's investment in American Express proves that a seemingly serious crisis that doesn't break the company's bones is often a great entry point for investment.

The American Express salad oil scandal was one good example.

Despite the credibility crisis, Buffett believed that the business model was not affected and that the competitive advantage of Express remained.

Buffett did some more research and found that:

1. Although the credit of Express was lower, the warehousing was only a small part of its business. It was like a small tumor has not yet spread. As long as the tumor is removed, it does not affect the health.
2. The traveler's check business of Express accounted for 60% of the global market share, with extremely high pricing power and a monopoly on services.
3. The Express credit card business was expanding rapidly and raised prices every year. It had a very high customer retention rate

As we all know later, $American Express(AXP)$ made Warren Buffett the master of stock.

Before investing in Express, Warren Buffett was an active investor- he personally involved in the management and operation of the company; and after Express, he became the Warren Buffett we are familiar with- find a good industry, looking for a good company, looking for a good assistant and help me make money.

GEICO Insurance: Float Helps Him Soar

Initial investment date:1951

Liquidation date: still holding

Annualized Rate of Return: unknown

In 1951, a 21-year-old Warren Buffett published a post in a business journal called "The Stock I Like Best", praising an auto insurance company called GEICO. He said the company:

1. Good industry. Car insurance is necessity and needs to be paid every year.
2. No problems with inventory, collections, labor and raw materials, product obsolescence and aging equipment.
3. Direct sales. Customers receive standardized contracts with low costs, and an underwriting margin of 27.5% in 1949( other companies with only 6.7%).
4. Potential market. Currently, it only had license in 15 of the 50 states, with great growth prospects.
5. Low P/E with 8x, which does not reflect a growth premium.
6. My good teacher, Graham, is the chairman of the board of this company.

But things took a sharp turn for the worse in the mid-70s and the stock price dropped from $61 to just $2.

Berkshire bought 1/3 of GEICO between 1976 and 1980 and completed the overall acquisition of GEICO in 1995.

The money to buy GEICO came from the cash flow provided by the Berkshire textile mills; and then the textile mills closed down, Berkshire's turned to the insurance industry. 

From then on, "Berkshire's main business is insurance."

In addition to the good profitability of the insurance business, the biggest advantage is to provide Berkshire with a large amount of low-cost funds - float.

Float provides a cheap leverage-1.6:1 capital leverage. That is, for every $100 of shareholder equity (market price), Berkshire matches $60 of debt with the leverage of the float.

This can greatly enhance Berkshire's return on investment, and it is this huge advantage of externalities that GEICO brings with other insurance businesses. Investments in the insurance industry are some of Buffett's most successful investments.

That's all about top 10 investments of Buffeet.

Share what you learn from Buffett's investment in the comment section~~

To learn about another 5 investments, you can read [Part 1]Warren Buffett's Top 10 Investments and Philosophy