Warren Buffett: The Power of Long-Term Investing in Quality Companies

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In his 2022 Berkshire Hathaway Annual Letter, Warren Buffett discussed his investments in Coca-Cola and American Express, which highlight the importance of investing in high quality companies with strong fundamentals, and holding them for long periods of time.

His key points include:

  • Berkshire Hathaway purchased significant stakes in both companies in the 1990s for $1.3 billion each
  • Dividends have grown consistently over time, from $75 million (Coke) and $41 million (Amex) to $704 million and $302 million respectively
  • Stock prices have also increased substantially, making each holding around 5% of Berkshire’s net worth
  • Comparison: If Berkshire had invested the same amount in a flat-lining asset, it would now be insignificant

Here’s an excerpt from the letter:

In August 1994 — yes, 1994 — Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion — then a very meaningful sum at Berkshire.

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.

American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.

These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago.

Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.

The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.

You can read the entire letter here:

Berkshire Hathaway 2022 Annual Letter

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Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds®. The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.