As the name implies, a large component of value investing
, a student of Ben Graham, has over his long investing career
chosen both good companies at fair prices and fair companies at
good prices. This year in his annual letter he shed more light on
how he views price and his results with different approaches to
"More than 50 years ago, Charlie told me that it was far
better to buy a wonderful business at a fair price than to buy a
fair business at a wonderful price. Despite the compelling logic
of his position, I have sometimes reverted to my old habit of
bargain-hunting, with results ranging from tolerable to terrible.
Fortunately, my mistakes have usually occurred when I made
smaller purchases. Our large acquisitions have generally worked
out well and, in a few cases, more than well."
A scan of Buffett's most profitable long-term holdings listed at
Berkshire Hathaway (
) in 2012 suggests which category they fall into.
Coca-Cola Company (
Having purchased his 400 million shares of the Coca-Cola Company
at a cost of $1.299 billion and now boasting a $14.5 billion
market value, Buffett has made a 1016% unrealized gain on the
holding, the largest of his top positions.
A historical price history from around 1988 to 1989, the years
Buffett bought his Coke shares, suggests that he was not waiting
for a low-price entry point on the stock. After trading publicly
since 1919, Buffett could have purchased Coca-Cola much cheaper
in the '70s, when it traded for under $1 by mid-decade. Rather,
he purchased in the late 80s, after the price had been trading up
for several years and was reaching historical highs (all on a
split-adjusted basis). His average cost per share was $3.25.
However, Buffett still believed this was undervalued, telling
Forbes magazine that the stock at the time did not reflect the
future growth likely in the company's international business.
Read more about the
Coca-Cola of 1989 here
American Express Company (
Having purchased his stake in American Express Company for $1.287
billion, its market value at year-end was $8.715 billion,
reflecting a 577% unrealized gain.
Part of this investment took place when a short-term setback at
the company created an opportunity for Buffett. Trying to
recuperate after a failed expansion in 1991, American Express
offered Buffett $300 million in preferred stock with an 8.5%
dividend and the right to convert it to common stock at $33 to
$37 per share. When it didn't reach that level, the stock was
automatically converted to common in 1994. Buffett continued
amassing a 10% stake in American Express by 1995, and paid an
average of $8.49 per share for the holding.
originally purchased preferred shares of American
, its common stock in 1991 bottomed to near five-year lows of
just over $5, and barely went above $6 for most of 1992, when he
was likely purchasing more stock. The stock continued to trade up
to historical highs over the following years, peaking in 2000. Up
to that point, Buffett only increased the holding slightly in
1998, and approximately tripled the holding in 2000.
Moody's Corp. (
Moody's is Buffett's third most-profitable top current holding,
giving him a 398% unrealized gain as it originally cost $287
million (though it is listed previously as costing $499 million)
and had a year-end market value of $1.43 billion.
Buffett acquired his stake in the company in 2000 when it spun
off from one of his other holdings, Dun & Bradstreet (
), which he purchased in 1999 and 2000. Though pricing
information isn't available for either of the companies prior to
2000, Buffett said of them in an interview with the Financial
Crisis Inquiry Commission in 2010:
"There is no staff [at Berkshire]. I make all the investment
decisions and I do all my own analysis. And basically it was an
evaluation both of Dun and Bradstreet and Moody's but of the
economics of their business. And I never met with anybody. Dun
and Bradstreet had a very good business and Moody's had an even
better business. And basically the single most important decision
in evaluating a business is pricing power. You've got the power
to raise prices without losing business to a competitor, and
you've got a very good business. And if you have to have a prayer
session before raising the price by a tenth of a cent (laughs),
then you got a terrible business. And I've been in both and I
know the difference."
Buffett kept what he believed was the better business and
eventually sold out of Dun & Bradstreet. Moody's stock pushed
to its highest level since 2007 earlier this year, at $55.58 per
's stock portfolio here. Also check out the undervalued stocks,
top growth companies and high yield stocks of Warren
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