How Buffett Turned $1 Billion into $27 Billion (Coca-Cola)
- Buffett invested $1 billion in Coca-Cola — now worth $27+ billion
- He thought Coke was worth 3x what the market was charging
- The math was simple: A legendary brand selling at a normal price? Obviously cheap.
- He hasn’t sold a single share in 36 years. That’s the power of owning a great business.
Buffett’s Biggest Bet (At the Time)
In 1988, Buffett did something surprising: he put over $1 billion into Coca-Cola stock. It was the largest investment Berkshire had ever made.
Why would a famous bargain-hunter pay up for a company everyone already knew was great?
Because Buffett thought the market was wildly wrong about what Coke was worth.
The Numbers (Keep It Simple)
What Coke looked like in 1988:
- Total company value: About $16 billion
- Annual profits: About $1 billion
- What Buffett paid: About $1 billion for a 7% stake
So Buffett paid roughly 15 years of his share of the profits. That’s not dirt cheap — average companies trade around 15x profits. But Coca-Cola isn’t average.
The question: Was one of the world’s greatest brands really worth just an “average” price?
Buffett’s Back-of-Envelope Math
Buffett doesn’t use complicated spreadsheets. Here’s roughly how he thought about Coke:
Step 1: What is Coke earning today? About $800 million in real, take-home cash (what we called “owner earnings” in Part 2).
Step 2: How fast is it growing? Coke had been growing 15-20% per year. Buffett assumed a conservative 15%.
Step 3: What’s a reasonable comparison? Government bonds were paying 9% at the time. That’s Buffett’s benchmark for “what else could I do with this money?”
Step 4: Rough math A business growing at 15% when the alternative only pays 9%? That growth is worth a lot.
Buffett estimated Coca-Cola was worth roughly $48 billion.
The market was pricing it at $16 billion.
That’s about 3x undervalued.
At 3x undervalued, you don’t need precise calculations. Even if Buffett was off by 30%, Coke was still dramatically cheap.
This is the “screaming test” in action: if the opportunity doesn’t scream at you, it’s too close to call. Coca-Cola screamed.
Why Coca-Cola?
Let’s check Coke against everything we’ve learned:
Did Buffett understand it? ✓
Coca-Cola’s business is beautifully simple: make syrup, sell it to bottlers, invest in keeping the brand strong. No complex technology. No unpredictable innovations.
Buffett once noted:
“75 percent of the people in the world have something in their mind about Coca-Cola. And overwhelmingly it’s favorable.”
That’s 130 years of brand-building. No amount of money can buy that.
Does it have a moat? ✓
Coca-Cola might have the strongest brand moat in the world:
- Everyone knows it — Recognition in virtually every country
- Everywhere you look — Millions of stores, restaurants, vending machines
- Emotional connection — Happiness, nostalgia, good times
- Can’t be copied — No competitor can replicate 130 years of trust
Can they raise prices? ✓
When Buffett invested, Coke had been raising prices 4-5% every year. Customers kept buying. That’s pricing power.
Is the money real? ✓
Remember “owner earnings” from Part 2? Coca-Cola’s were excellent.
The business doesn’t need expensive factories or constant upgrades. It makes syrup and spends on marketing. Almost all the profit is real cash that owners can keep.
Is there a safety cushion? ✓
Buffett thought Coke was worth $48 billion. The market was charging $16 billion. That’s a 67% discount — massive margin of safety.
Even if he was significantly wrong, he’d still do fine.
Why Was Such a Great Company So Cheap?
If Coca-Cola was so obviously wonderful, why wasn’t everyone buying it?
The 1987 crash still haunted people
The stock market had crashed just a year earlier. Investors were scared of “expensive” stocks, even great ones.
Pepsi was winning taste tests
The “Pepsi Challenge” had made headlines. Wall Street worried Coke was losing its edge.
The New Coke disaster
In 1985, Coca-Cola changed its formula. Customers revolted. The company retreated. Some investors lost faith in management.
Recession fears
People worried that if the economy slowed, soft drink sales would fall.
Buffett saw through all of this. Taste tests and formula changes were noise. The brand that had dominated for 130 years wasn’t going anywhere.
Short-term fears created a buying opportunity.
The Results (36 Years Later)
Coca-Cola became one of the greatest investments in history.
The first 10 years (1988-1998): - Buffett’s cost: ~$2.60 per share - Value 10 years later: ~$40 per share - Return: About 15x his money
Today (2024): - Original investment: ~$1.3 billion - Current value: $27+ billion - Annual dividends: $750+ million (more than half the original investment — every year)
Total return: 3,500%+
The remarkable part: Buffett has never sold a single share. Through recessions, financial crises, and market panics — he just kept holding.
The Lessons
Great + Growing + Reasonably Priced = Wealth
Coca-Cola wasn’t a bargain-bin deal. It traded at a normal price. But for a business this good, “normal” was actually cheap.
Moats Can Get Stronger
Coca-Cola’s advantage hasn’t faded — it’s grown. Global expansion, new products (Dasani, Vitamin Water, Costa Coffee), and relentless marketing have made the moat wider.
Time Loves Great Businesses
Buffett bought 36 years ago. He’s still holding. The compounding hasn’t stopped.
For truly wonderful businesses, the right holding period is forever.
Dividends Add Up
Berkshire receives $750+ million in Coca-Cola dividends every year. That’s more than half the original investment — paid out annually.
Over 36 years, dividends alone have returned many times the purchase price.
The Checklist
| Question | Coca-Cola |
|---|---|
| Do I understand it? | ✓ Simple: make syrup, build brand |
| Does it have staying power? | ✓ 130-year-old brand, global distribution |
| Is management good? | ✓ Strong leadership, smart spending |
| Is the money real? | ✓ ~$1 billion in cash profits |
| Is it obviously cheap? | ✓ Worth ~$48B, priced at ~$16B |
| Big enough safety cushion? | ✓ 67% discount |
Coca-Cola shows Buffett’s approach at its clearest:
- Understand the business (syrup + marketing = profits)
- Verify the moat (the world’s strongest brand)
- Estimate real earnings (~$1 billion)
- Compare to alternatives (9% government bonds)
- Find massive undervaluation (worth 3x the price)
- Buy and hold forever
The result: 3,500%+ returns over 36 years. And he still hasn’t sold a single share.
Next up: Part 12 — Apple. The guy who avoided tech stocks for 60 years made Apple his biggest investment ever. Here’s how he saw it differently than everyone else.
References
Hagstrom, R. (2013). The Warren Buffett Way. Wiley. Also: GuruFocus Analysis.
Buffett, W. (2007). Berkshire Hathaway Shareholder Letter. Berkshire Hathaway Inc.