Why Did Warren Buffett Invest Heavily in Coca-Cola (KO) in the Late 1980s?

Warren Buffett bought more than $1 billion in shares of The Coca-Cola Company (KO) in 1988, an amount that was then equivalent to 6.2% of the company. The purchase made it the single largest position in Buffett’s Berkshire Hathaway Inc.’s (BRK.A, BRK.B) portfolio at the time.

Coca-Cola stock remains one of Berkshire Hathaway’s biggest holdings today. As of the end of September 2022, the holding company owned a 9.2% stake worth more than $22 billion in the company.

But what made the Berkshire Hathaway chair make the purchase at that time, when the stock was still reeling after the 1987 market crash? And why has he held onto shares of the soft drink company for so long?

Good Stocks Sunk by the Crash

The stock market crash of 1987 created some attractive opportunities for investors, as all stocks were sold off with little regard to their fundamentals.

Coca-Cola was an example. It was (and is) the dominant company in the beverage industry. As of 2022, it sells more than 200 brands of beverages, from Costa Coffee to vitaminwater, in over 200 countries.

In marketing parlance, Coca-Cola’s iconic name and global reach created a “moat” around its core soft drink product. A successful brand builds the name recognition, the distributor network, and the retail relationships that protect it from encroachment by competitors.

Warren Buffett understood that no competitor was going to appear and take away Coca-Cola’s market share. On the contrary, the company has steadily absorbed potential competitors over the years and expanded into new trends through purchase such as Ayataka green tea and Dasani water.

An Evolving Investing Philosophy

The Coca-Cola purchase suggested that Buffett’s investing philosophy had evolved from Benjamin Graham and a focus on finding companies that had a value exceeding their market prices.

This adjustment was necessary to account for the growing size of Buffett’s portfolio, which made it more difficult to take advantage of market inefficiencies. Its sheer size also hindered any attempts at active management and reduced the number of opportunities he could consider that would have a meaningful impact on the portfolio’s performance.

Notably, the influence of Charlie Munger, the vice-chair of Berkshire Hathaway, and his philosophy of ethical investing also played a part.

Coca-Cola heralded a change in Buffett’s approach from “buying bad companies at great prices” to “buying great companies at good prices.” By the end of 2020, Buffett’s continuing investments in Coca-Cola had returned 1,550%, not including dividends.

Buffett’s Top 10 Holdings

Warren Buffett continues to be an investor in Coca-Cola today. The Berkshire Hathaway stock investment portfolio’s top 10 stocks—by market value—based on an SEC filing in November 2022 are as follows:

1. Apple (AAPL), $130.7 billion
2. Bank of America (BAC), $33.5 billion
3. Chevron (CVX), $29.5 billion
4. Coca-Cola (KO), $25.4 billion
5. American Express (AXP), $23.5 billion
6. Kraft Heinz (KHC), $13.1 billion
7. Occidental Petroleum (OXY), $12.4 billion
8. Moody’s (MCO), $7.2 billion
9. BYD Co. (BYDDF), $4.8 billion
10. Taiwan Semiconductor (TSM), $4.8 billion

The Bottom Line

Warren Buffet’s Berkshire Hathaway made a significant investment in shares of beverage giant Coca-Cola in 1988, when the stock’s price was depressed following a market crash. Buffet and others at Berkshire recognized Coca-Cola’s market advantages, believing that the company was poised to recover. This marked a change in Buffet’s investment philosophy, with the focus shifting from “buying bad companies at great prices” to “buying great companies at good prices.” The investment paid off, and Coca-Cola remains one of Berkshire’s top holdings.