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Strategies & Market Trends : Value Investing
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From: Graham Osborn3/18/2018 5:09:11 PM
1 Recommendation

Recommended By
Lance Bredvold

  Read Replies (1) of 78751
 
I was looking at KO as it would have appeared to Buffett back in 1987-88, and I concluded it wasn't really that extraordinary a buy. Top- and bottom-line growth were only on the order of 10%, although you might have argued that sustainable growth at that level for the next 10-20 years with low tangible-asset requirements was attractive (which is true). The stupendous capital gain was mostly a result of secularly declining interest rates which noone could have foretold. And of course, the PE was around 13 which was not terrible given the growth rate. MSFT had extraordinary growth during that period although they had some accounting issues (so did KO for that matter). Nowadays KO really is a mess of a business (brand nonwithstanding). Most of the retained earnings they had accumulated by the mid-2000s have vanished leaving only about 500M in tangible net worth. Even the top line seems to be suffering. But they were doing OK at least on paper up until 2000 or so.

We have to be careful which investment decisions we enshrine without proper context. MSFT, GOOGL, and AAPL were all no-brainers after 5 years of steady retained-earnings growth, and Buffett managed to miss them all due to his decorticate tech ban. This is all the more ironic given that these businesses (apart from the technology) satisfy Buffett's requirements perfectly - they are tangible-asset light businesses with high returns on equity, good pricing power, and expanding economic goodwill. At least 2 of them have been run by incompetent CEOs who nevertheless failed to destroy the underlying business moat completely.
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