Warren Buffett had admired the Coca-Cola company ever since he was a six-year old (1936) buying packs of six Coca-Cola bottles for 25 cents and selling them individually for 5 cents each (he did this around his Omaha neighbourhood after buying from his grandfather’s grocery store, and on holiday at Lake Okoboji, Iowa),
“I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product” (1989 Letter to Berkshire shareholders).
But for the following 51 years he chose not to buy a single share in the company despite being fully aware of the power of its brand and its growth decade by decade.
Both excellent economic characteristics and the potential for growing owner earnings are potent reasons for being drawn to a company, but they are insufficient for making a decision to buy its shares – you must always remember to ask the price.
If the price does not allow for a significant margin of safety then the code of the disciplined value investor dictates that it must be left alone.
Admire from a distance, keep following the story, but if the price keeps going beyond the safe level then opt for masterly inactivity.
Something changed in the 1980s that made Buffett and Munger think, at last, intrinsic value was jumping by leaps and bounds while the share price was responding inadequately to the good news flowing from the company; the share was going up, but at a slow enough rate to allow the margin of safety to grow.
The big change was the two key people running Coca-Cola, Keough and Roberto Goizueta, were demonstrating, in the reporting numbers and in the strategic positioning of the company, that they had created a very strong economic franchise and they were deepening and widening the moat protecting that franchise.
In fact, the franchise was so strong that Buffett categorised Coca-Cola as that very rare thing, an Inevitable.
Inevitables
The Inevitables are the best type of companies to own. These are firms which will be dominating their fields for an investment lifetime due to their enormous competitive strengths.
They are found in sectors not likely to experience major change. A fast-changing industry precludes the possibility of reaching the point of dominance over a span as long as three decades.
To get in the right frame of mind to recognise an Inevitable imagine that you are about to embark on a ten-year mission to Mars and you are unable to change the constituents in your portfolio while you are gone.
If you can make only one investment now what would you look for?
Answer: certainty.
Your chosen company would need to op
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