Sometimes, we can learn from great investors – but what works for them may not necessarily work for us. Take Warren Buffett for example. Some of the shares he owns I understand as businesses. But others I do not. So I would not invest in them even if they have performed brilliantly for the ‘Sage of Omaha’.
That is because I like to stick to what Buffett calls my ‘circle of competence’. After all, putting money into businesses I do not understand is not investing at all, but simply speculation.
Here’s a simple, proven and compelling business model
Some of Buffett’s investments sit well inside my own circle of competence. For example, take his holding in Coca-Cola (NYSE: KO).
I think the investment case here is strong. The market for soft drinks, including water, is vast and likely to stay that way for the foreseeable future.
Lots of companies compete in that space. So what sets Coca-Cola apart? It has unique competitive advantages, including iconic brands and proprietary formulas. The company enjoys economies of scale, thanks to its large global footprint.
Coca-Cola has also devised an interesting division of labour. Local bottlers (in which it may own a stake) are responsible for much of the sharp-end production, sales and distribution. (London-listed Coca-Cola HBC and Coca-Cola Europacific Partners are examples).
So Coca-Cola itself can focus on brand building and selling syrups to those bottlers. That is a leaner model than trying to do everything and lets it focus on where its biggest strengths lie.
It’s been an incredible investment for Buffett
No wonder Buffett likes the business. Since finishing building his stake in 1994, it has soared in value – and he now gets over half of his original investment back every year in the form of dividends alone.
When it comes to dividends, Coca-Cola also has an excellent track record. The business model throws off a lot of spare cash and that can support strong dividends. Last week, the company announced it would increase its dividend per share for the 63rd year in a row!
Should I buy the shares?
However, although Coca-Cola has been a roaring success for Buffett, he has not bought any shares in the company since the last century.
I do not know why. Maybe he wants to keep his portfolio sufficiently diversified. One risk I see is that changing consumer attitudes to healthy drinking could see long-term demand decline for many types of soft drinks, hurting sales and profits at Coca-Cola.
But what puts me off buying Coca-Cola shares for my portfolio is its share price. Currently, the company trades on a price-to-earnings ratio of 28. That is higher than I would like to pay, even for a brilliant business like this one.
Every investor is different and needs to make their own decision. What works for Buffett may not be the right choice for me.
When it comes to his holding in Coca-Cola, I think me buying the share could make sense – but only at the right price.
Buffett says he likes to buy stakes in great companies at attractive prices. Me too!
But for now, Coca-Cola is on my watchlist and I will not be investing this year, unless the valuation becomes significantly more attractive.
