Goizueta, a Cuban-born chemical engineer, took over in 1981 and made Keough, a broad-smiling salesman, his number two. Goizueta’s first instinct was to continue diversifying.17 In 1982, Coca-Cola branched into movies by acquiring Columbia Pictures, a sideshow that Buffett disliked.18 Its annual report for that year devoted six pages to its film studio (including a full-page photo of a sunburned Dustin Hoffman) and wine business and only three pages to overseas cola sales.
The company also was rolling out diet Coke, which proved to be a winner. Goizueta soon began to shift his focus to the burgeoning battle for the U.S. cola market.19 He was so caught up in fighting Pepsi-Cola that in 1985 Coca-Cola ditched the syrup formula that had served it for a century and unveiled “New Coke.” This stupendous error paid an unexpected dividend. The old drink was, truly, brought back by popular demand.
Buffett switched his drink from Pepsi to Cherry Coke at about the same time. The stream of cherry-flavored fizz seems to have had a catalytic effect, and he began to look at Coca-Cola’s stock with increasing interest.20 The New Coke fiasco merely made the company more compelling to him. As Buffett explained it, Coca-Cola knew that Americans had preferred the sweeter New Coke, but when people were told about the switch, they wanted their old Coke back. The drink had “something other than just the taste—the accumulated memory of all those ballgames and good experiences as children which Coke was a part of.”21 As Buffett dug into his research, he read everything on Coca-Cola he could find. One paragraph in a Fortune story caught his eye:
Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola’s record, but comes regretfully to the conclusion that he is looking too late.22
This had been published way back in 1938 (when the stock, adjusted for later splits, cost forty-six cents a share). Even then, Coke had been seen as “a sublimated essence” of all that America stood for;23 even then, the sound of a nickel dropping down the slot, followed by “a whir and a clunk” and an ice-cold bottle sliding out the chute, had been something to behold. And it had been known, even in 1938, that the potential thirst of people overseas was far from quenched. That was the thing that got to Buffett.
By the mid-eighties, he saw that the light had finally dawned on Coca-Cola’s management. Goizueta was divesting the company’s un-cola side ventures. And the Yale-educated sugar baron’s son, who had begun his career at a bottling plant in Havana, was paying more attention to marketing Coke overseas.
A case in point was the Philippines, where the San Miguel brewery, which bottled Coke as well as beer, had neglected soft drinks and allowed Pepsi to take the lead in colas. The home office invested $13 million to become a partner in its bottler, and Coca-Cola soon won back two-thirds of the market.24
Spurred by success in the Philippines, Coca-Cola moved to strengthen bottling operations in Brazil, Egypt, Taiwan, China, Indonesia, Belgium, Holland, and Britain. In France, where the per capita was a dismal thirty-one drinks a year, Coca-Cola began a lengthy fight to sack its bottler. Also, the company became more attentive to margins. In Mexico, a big market with subpar profits, prices were hiked and earnings soared. The change in focus was hardly a secret—in fact, it screamed out from the pages of Coca-Cola’s annual reports. The cover of the 1986 report depicted three Coke cans perched on top of the world. Inside, the company hungrily eyed its future:
The potential appears limitless, and the Coca-Cola system is aggressively implementing … soft drink availability, affordability and acceptability around the world.
The numbers in those reports showed that Coca-Cola’s strategy was reaping a substantial payoff. From 1984 to 1987—that is, before Buffett invested—the total of gallons sold overseas rose 34 percent.25 Profit margins on each gallon rose, too, from 22 percent to 27 percent, thus providing a double dip. In all, foreign profits surged from $607 million to $1.11 billion.
The larger picture was of a company redirected. Whereas in 1984 Coca-Cola had earned just a shade more than half (52 percent) of its profits overseas, by 1987 a full three-fourths of its income was international. And the untapped potential remained vast. In the fast-growing Pacific Rim, people still drank fewer than twenty-five Cokes a year; in Africa, even fewer. Even in Europe and Latin America, where Coke had been served for decades, the per capitas were less than one hundred.26 Moreover, the profits per drink in those populous and far from sated areas were much, much higher than at home. To Buffett, it amounted to a convincing case that the “coupons” on Coca-Cola would be rising for a very long time. “What I then perceived,” Buffett wrote after his investment but before the stock had really taken off,
was both clear and fascinating … What was already the world’s most ubiquitous product [had] gained new momentum, with sales overseas virtually exploding.27
In addition, Goizueta was using the company’s excess cash to buy back stock—the same approach that Buffett had urged on Katharine Graham at the Post. He was also grading his managers according to their return on capital. Sounding remarkably like Buffett, Goizueta, who had no training in finance, would later remark, “I learned that when you start charging people for their capital, all sorts of [good] things happen.”28 Buffett recognized a kindred spirit.29
By the latter part of 1988, Coca-Cola was trading at thirteen times expected 1989 earnings, or about 15 percent above the average stock. That was more than a Ben Graham would have paid. But given its earning power, Buffett thought he was getting a Mercedes for the price of a Chevrolet. In his own mind, he was not abandoning Graham—far from it.
I felt as sure of the margin of safety with Coke as when I bought Union Street Railway at 40 percent of net cash. In both cases you’re getting more than you’re paying for. It’s just that one was easier to spot.30
In fact, every analyst on Wall Street had spotted it. What Buffett knew about Coca-Cola was disclosed in detail in company reports and was understood, intuitively, by the average fourth-grader. Coke, simply, was the best-known brand in the world. But with a couple of exceptions (First Boston’s Martin Romm called Coca-Cola a “strong buy”), the analysts dithered. It wasn’t their research that failed them, it was nerve. Dean Witter’s Lawrence Adelman observed, “Coca-Cola has the potential to expand profits at a rate significantly higher than the S&P 500 over the next five years.”31 But Adelman couldn’t pull the trigger; he sent his clients a waffling “buy/hold” opinion on the stock. Roy Burry, Kidder Peabody’s man on the beat, also expected strong profit growth, but Burry was dissuaded from recommending the stock by “uncertainty about the near-term movement of the dollar.”32
A more interesting case was PaineWebber’s Emanuel Goldman, who liked Coca-Cola but preferred the more diversified PepsiCo.33 Goldman showed the Wall Street disease of paying too close attention to the trees. Pepsi, he noted, could expect a boost from higher Frito Lay prices, better results with Mountain Dew, home delivery of Pizza Hut, a forty-nine-cent meal at Taco Bell, and healthier fare at Kentucky Fried Chicken. Buffett also looked at Pepsi (which would also turn out well).34 But he did not have the same degree of certainty about pizza, chicken, and tacos. He could reduce Coke’s virtues to a sentence:
If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.35
After Buffett invested in Coca-Cola he became one of its directors, but his role on the board was passive.36 In short, anyone could have bought the stock when he did and gotten the same result. Yet Wall Streeters were dubious that much could be learned from Buffett. They maintained that he got his ideas from a network of tipsters that they, of course, could not hope to crack. As an Omaha broker said, with a knowing air, “Warren had the best network.” This fulfilled the hoariest of Wall Street clichés: that the little guy was no match for the savvy pro.
A few of Buffett’s negotiated deals, such as Salomon, did arise from personal connections, and Buffett’s circle of such contacts was extensive. But most of
his investments were market-traded stocks. And, in fact, he instructed his brokers not to distract him with their hot ideas.37 According to Munger, he used his contacts to investigate prospects after he had a lead.
Given Buffett’s usual holding period, tips would have been of dubious value—it is hard to conceive of a “tip” that would be relevant five years later. However, the “tips” rationalization absolved others who had not thought of the same ideas, and who resented Buffett’s success. Once, when an investor put in an order for yet more Berkshire, his Manhattan broker snapped, “Warren makes mistakes, too.” It is hardly a surprise that Buffett was resented, since he made a point of mocking the complex “tools” on which other money managers relied. And some of these others, being less than anxious to slog through annual reports, were reluctant to believe that Buffett found his stocks the way he said he did. One financial editor inquired about Buffett’s “secret”—a black box, perhaps, hidden in the bowels of Kiewit Plaza?
Buffett kept insisting that he had no mysterious shortcut, no crystal ball. Once, a broker who was buying a house asked for his outlook on interest rates. Buffett jokingly replied, “Only two people understand that. Both of them live in Switzerland. However, they’re diametrically opposed to each other.”38
Most of what Buffett did, such as reading reports and trade journals, the small investor could also do. He felt very deeply that the common wisdom was dead wrong; the little guy could invest in the market, so long as he stuck to his Graham-and-Dodd knitting.39 But people, he found, either took to this approach immediately or they never did. Many had a “perverse” need to make it complicated.40 This truism extended to Buffett’s family.
His elder sister Doris once tried to juice up her income by selling “naked options”—precisely the sort of market roulette that Buffett had scorned. Come Black Monday, Doris, who rather liked living on the edge, found herself $1.4 million in debt.41 Warren agreed to reorganize a family trust that he administered for Doris, so that she would now get a monthly stipend from it. But he flatly refused to pay off the debt—leaving Doris no choice but to default. She was badly hurt by Warren’s refusal, and he was hurt by her subsequent spell of coolness. But bailing out a speculator went against his grain—and Warren would not break his rules, not even for his sister.
Of course, following Graham and Dodd would not make Doris—or most anyone else—as gifted as Buffett. At the mere mention of a stock—any stock—he could spit back a fact-filled summary of it, just as the young Warren had once recited from memory the populations of cities. Similarly, his ability for figures left his colleagues stunned.42 (Buffett explained his penchant for mental math by saying that if he didn’t understand a figure in his head, he didn’t “understand” it; thus, no computer.)43
People habitually referred to his mental processes in mechanical terms. Doris, herself, reflexively remarked how quickly information appeared on Warren’s “screen”; Mike Goldberg spoke of his “iterating” insurance policies through his memory. This agile sifting of mental index cards enabled him to recognize past patterns and, through untold repetitions, develop an investing instinct. Alas, the average investor is not endowed with a mental calculator or an on-line encyclopedia.
This does not imply that Buffett could not be a useful model. (A clinic with Ted Williams should make one a better hitter, even if not a .400 hitter.) Anyone is free to adopt the approach of evaluating a stock as a share of a business, rather than a blip on a screen, just as anyone is free to trade options. Munger said the Buffett style was “perfectly learnable.”
Don’t misunderstand. I do not think that tens of thousands of people can perform as well. But hundreds of thousands can perform quite well—materially better—than they otherwise might. There is a duality there.
Part of the “duality” was that people confused “simplicity” with “ease.” Buffett’s methodology was straightforward, and in that sense “simple.” It was not simple in the sense of being easy to execute. Valuing companies such as Coca-Cola took a wisdom forged by years of experience; even then, there was a highly subjective element. A Berkshire stockholder once complained that there were no more franchises like Coca-Cola left. Munger tartly rebuked him. “Why should it be easy to do something that, if done well two or three times, will make your family rich for life?”44
Buffett said it did not require a formal education, nor even a high IQ.45 What mattered was temperament. He would illustrate this with a little game at business schools. Suppose, he would tell a class, each student could be guaranteed 10 percent of one of their classmates’ future earnings. Whom would they choose? The students would start to scrutinize one another intently. They weren’t looking for the smartest, necessarily, Buffett would observe, but for someone with the intangibles: energy, discipline, integrity, instinct.
What mattered most was confidence in one’s own judgment, from which would flow the Kiplingesque cool to keep one’s head “when all about you are losing theirs.” In market terms, if you knew what a stock was worth—what a business was worth—then a falling quote was no cause for alarm. Indeed, before he invested in a stock, Buffett wanted to feel sufficiently comfortable so that if the market were to close for a period of years and leave him with no quoted price at all, he would still be happy owning it.46 This sounds extraordinary, but one’s house is not quoted day-by-day, and most people do not lose sleep over its value. That is how Buffett looked at Coca-Cola.
The disclosure of his investment, in March 1989, seemed to inject the stock of Berkshire Hathaway with an unusually bubbly carbon dioxide. Berkshire, at the time, was trading at $4,800 a share. In a mere six months, it rose 66 percent, to $8,000.
Buffett, now worth $3.8 billion, seemed born to his new investment. He quickly became a fount of Coca-Colaisms. He would recite to any who would listen Coke’s “per capitas” in countries around the globe, or dissect a can of Coke according to its financial ingredients. He knew the sales, the growth rates. He got a rush from gazing at the red-and-white cases stacked up in a supermarket, and he took comfort, he explained to a visitor, in knowing that people were drinking the product at that very moment, as they were sitting there in Buffett’s office.47 He knew the figures by rote: a penny of profit on each eight-ounce serving, 700 million servings a day, 250 billion a year.
* Buffett defined cash flow as reported earnings plus depreciation, depletion, amortization, and certain other noncash charges, less the average annual capital expenditures required for a company to maintain its unit volume and competitive position.8
† Does not include arbitrage or undisclosed small purchases.
Chapter 19
HOWIE BUFFETT’S CORN
In 1980, Buffett had written a scathing article in the Omaha World-Herald blasting the self-indulgence of the superrich. To Buffett, a vast pool of wealth, such as his own, represented a pile of “claim checks,” which ultimately should benefit society. He zeroed in on Hearst, who had squandered his claim checks on the grandiose San Simeon, thus diverting “massive amounts of labor and material away from other societal purposes.”
Buffett was just as critical of the superrich for leaving fortunes to their heirs. The latter-day Du Ponts, for example, had “contributed very little, if anything, to society while claiming a great many times their pro rata share of its output.” With a typically egalitarian flair, Buffett noted that the Du Ponts “might believe themselves perceptive in observing the debilitating effects of food stamps for the poor” but were themselves living off a “boundless” supply of “privately funded food stamps.”1
The Du Ponts would not have recognized the Buffett clan. Warren had a cousin who drove a cab, a nephew who played in a jazz band, and so on. Some of them owned stock in Berkshire, but Buffett went out of his way to avoid giving favors or tips. His familial relationships, he felt, would be “cleaner” without the distorting element of financial dependency.
Most of all, he wanted his grown children to lead normal, independent lives. This forced him, at l
east as he saw matters, virtually to cut them off from financial support. He was so wary of spoiling his likable kids with “food stamps” that he refused them even the dollop of financial help that children of moderately wealthy parents receive as a matter of course.
His attitude baffled his millionaire friends (save for Munger, who came close to agreeing with him). When the Graham group debated what was the “right amount” to leave to one’s children, Buffett said a few hundred thousand ought to do it.2 Larry Tisch protested, “Warren, that’s wrong. If they aren’t spoiled by age twelve, they won’t be spoiled.” As Kay Graham, who was grooming her son to take over the Post, recalled, “That was the one thing we [Buffett and she] argued about.”
Buffett did care very deeply about his kids. Moreover, he was a tolerant, in some respects an enlightened, father. He encouraged his kids to follow their stars, and he was patient when one of them suffered a disappointment—in a career, for instance, or in a marriage. But where money was involved he was impersonal and at arm’s length, as though his kids were merely junior financial partners. There was a good deal of sanity in his approach—a billionaire should set limits—but Buffett, as in his professional life, was blind to any middle ground. When Susie needed $20 to park at the airport, she had to write her father a check. When Buffett gave his kids a loan, they had to sign a loan agreement, so that it would be plain, in black and white, that they were legally on the hook to him.3
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