As the name implies, a large component of value investing involves price. Warren Buffett , 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 it:
"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."
Coca-Cola Company ( KO )
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 ( AXP )
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.
Although Buffett originally purchased preferred shares of American Express , 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. ( MCO )
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 ( DNB ), 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 share.
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