How Did Buffett Lose $1 Billion?

Now that the first quarter has officially come to an end, there is one Warren Buffett Berkshire Hathaway portfolio stock that dropped in value by more than $1 billion. And the stock in question will certainly surprise you.

Having a Tough Start in 2014

The Coca-Cola Company had no choice but to sit back and watch its stock drop by 6.4% during the first three months of 2014. Considering that Warren Buffett has more than 400 million shares worth a total of $16.5 billion at the beginning of the year, his position is now $1.1 billion less, and this is a staggering figure.

Company sales figures dropped below analyst expectations when it’s mid February earnings announcement took place. As more Americans start to become health-conscious, there are many questions surrounding soft drinks sales in their future. Many people are starting to wonder if the lasting value of Coca-Cola still exists.

What Is the Market Missing?

Warren Buffett once told us that he likes “to stick with what I really think I can understand,” and even though it’s troubling, it appears that a number of people have misunderstood or lost sight of Coca-Cola’s true reality.

There are many people who forget that Coca-Cola is going to expand its circle of competence and beverages, on the outside of its core products. The company spent $4.2 billion acquiring Vitamin Water in 2007. This year in February, the business also mentioned buying a 10% stake in Green Mountain coffee, whose stock has risen by 25%. Coca-Cola’s current stake is $1.25 billion in the business. And even all of this will say nothing of its pivotal, yet smaller brands like Honest Tea and Simply.

Additionally, many people do not realize Coca-Cola’s willingness to return earnings to shareholders. The company reported a net income of $8.6 billion in 2013, and gave $8.5 billion back to shareholders through share repurchases and dividends.

It’s one of the main reasons why the company’s adjusted earnings per share, excluding currency and other things that impact it, were up by 8% despite net income dropping by 5%.

Warren Buffett even recognized that due to the buybacks, Berkshire Hathaway’s total ownership of Coca-Cola rose to 9.1% from 8.9%. Even though this might not sound very significant, he mentioned “if you think tenths of a percent aren’t important, ponder this math: For the four companies [Wells Fargo, American Express, Coca-Cola, and IBM] in aggregate, each increase of 1/10 of a percent in our share of their equity raises Berkshire’s share of their annual earnings by $50 million.”

This all says that Mr. Buffett isn’t worried about Coca-Cola’s ability to generate fantastic returns for those who own stock, even when growth “misses expectations.”

Warren Buffett Is Not Deterred

As previously mentioned, Berkshire Hathaway’s position value in Coca-Cola has dropped and is only worth $15.4 billion. Berkshire Hathaway only paid $1.3 billion for the shares, so Berkshire and Buffett are still plenty in the green with their Coca-Cola investment.

And when you think about Buffett’s remarks a year ago stating “we’ve never sold a share of Coca-Cola stock, and I wouldn’t think of selling a share,” this is not a real loss, but only a loss on paper.

One Comment

  1. I'm pretty impressed with the depth of knowledge and coverage that you have about Warren Buffett.

    I like WB a lot — I've studied 90% of what he's written. With his stake in Coca-Cola, yeah, $1B is a lot of money, but you're right that it's just a paper loss. But, really, it's too bad that he's at the point now where he has to hold onto stocks like these. His AuM is far too large to sell stocks like KO to pursue other more profitable opportunities like he did when he was investing at his best (racking up the highest returns possible). This is what I mean:

    Do you have any info on the tiny personal portfolio that he runs? I'm really curious about that but I haven't been able to find much information.

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