Warren Buffett the #GOAT

Friday of this week will be legendary investor Warren Buffett’s 94^th birthday.

In honor of Buffett, we will break our regular schedule of notes for HX Daily and share several essays on our (reasonably unique) perspective on Buffett.

This first note will make a point that many of my regular readers have heard me make in the past…Buffett has made his money as a GROWTH investor rather than a VALUE investor.

What does this mean?

Look up the definition of "value investor," and you get the following…

That next sentence in that article says…

“Warren Buffet is probably the best-known value investor today…”

What does it mean to be a value investor?

Read the writings of Benjamin Graham and many of the "founding fathers" of value investing, and you will read about them buying companies at less than "book value, " which is the accounting value of their assets.

There will also be many examples of buying a company below the replacement value of its assets or liquidation value.

These “buy $1 of assets for $0.50” opportunities used to exist in the stock market fifty years ago. That was before these strategies became more well known, the explosion in the asset management business and – most importantly – the Internet.

Outside the complex distressed security market, there are very few of these opportunities in the stock market anymore—certainly not large ones.

Buffett began his professional investing career in the 1950s and 1960s when these opportunities still existed.

Looking at how he ACTUALLY made his money, though, you see that it was NOT on these types of opportunities.

Instead, it was buying large companies that would GROW their earnings tremendously.

Let’s look at his most famous investment – The Coca-Cola Company (NYSE: KO).

He initiated this position in 1988, and his $1.3 billion investment has turned into a $24.5 billion stake or a profit of $23 billion.

Here is a Financial Analysis table of the key financial metrics for KO since 1988 and through the end of 2023…

Let’s discuss both tables.

We don’t have precise data, but Buffett began buying KO in 1988. For the purposes of our analysis, we ran our numbers as if he had taken four years to enter the position.

Across those four years, the stock's media price-to-earnings (P/E) ratio was 15.8x. Over the next three decades, the median P/E ratio was slightly less than 27x.

This means that the appreciation from a multiple perspective was +70%.

Also note that at 16x forward EPS back in 1988, KO was a +10% premium to the multiple of the S&P 500. Even the next year (1989) was only a -15% discount, and 1990 was a premium again.

Now, let's look at earnings per share (EPS) over the period. It has grown +2370% from $0.18 per share to almost $2.50 per share in 2023.

Looking at the almost +2200% increase in the stock price across this thirty-five-year period, the expansion in earnings multiple (+70%) certainly helped, but the REAL driver was earnings growth.

This was also a stock that was NOT trading at a discount to asset value or the overall stock market at the time.

The VALUATION of KO stock did not drive the appreciation in Buffett's stake; rather, it was the GROWTH in earnings that did.

Now, let's go back to the definition of "Value Investing" at the top. It does take into account this situation.

It says value investors seek "…stocks that they think the stock market is underestimating."

This captures what happened with KO stock.

It wasn’t that it was trading at a discount to the asset value at the time or the stock market, but it certainly was excellent value given the future growth that would happen. In THAT sense, it certainly was a good "value" purchase.

This means the critical stock analysis was NOT about understanding the VALUE but rather about handicapping the GROWTH.

It is interesting to note that the return we quoted above was the return of his stock holdings, not his total returns.

If we consider the dividends that were paid, that is another +952% return. This brings his return to over +3000% on his KO holding.

The annual dividend has grown from $0.08 per share to $1.84 per share or +2200%. That number is almost the same as the earnings growth.

Again, the key to this investment is the GROWTH of the company.

While Buffett is lauded as the most extraordinary living (or ever) VALUE investor of all time, we think the KEY to his success has been identifying GROWTH.

This brings us to our favorite Buffett quote…

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This is something that every young investor should take to heart…

Do you think VALUE or GROWTH strategies are more important to Buffett's success? We want to hear your thoughts! Please share with us in the comments section online or at [email protected]