50% a year? Impossible, you think. How could Warren Buffett possibly earn that much from a single investment?
You’re about to find out.
There’s a reason Warren Buffett earned the name the Oracle of Omaha. He can see (decades into the future) the effects of powerful forces that move slowly from one day to the next but that create tectonic shifts in economic fortunes over time.
Take inflation as an example. When it’s hovering around 2%, the average consumer doesn’t notice the price of milk going up from one year to the next. When the cost of a $3 milk carton rises to $3.06 next year, do you really pay attention?
Most don’t, but Warren thinks in decades not days, weeks, or years. And he know that 2% over 10 years is a 20% increase in value. Asset prices tend to keep pace with inflation, unlike wages… so he buys assets, and lots of them. And every decade, he can bank on the nominal value of his assets rising at least 20%, even if he bought the asset at fair value.
Another powerful force that affects wealth is selling winners….and then paying taxes. By repeatedly selling winners, and paying a fraction of those gains in taxes, the wealth you can build over a decade or two is considerably smaller than staying patient and holding the position long-term.
Add these insights to his astute investing acumen that strives to buy undervalued businesses with wide moats, and you’ve got a recipe for making a fortune.
An example of putting all these ingredients into a pie that has produced enormous wealth is Buffett’s investment in Coca Cola.
How Buffett Earns Over 50% A Year On 1 Stock
When Buffett first bought Coca Cola, he bought a company that had all the ingredients we discussed above. First, Coca Cola has the ability to increase prices every year by small margins that are barely noticeable from one year to the next but which translate to significant pricing increases and profitability long-term.
Coca Cola has a brand advantage and distribution network that is virtually unrivaled. You can drive for miles in Tanzania and see nothing but Coke ads on signs on the sides of roads. That’s a small anecdote to simply highlight that Coca Cola has global reach.
When Buffett bought Coca Cola, his cost basis (adjusted for splits) was $3.25 per share. Right now, the company pays a dividend of $1.76 per share, meaning that Buffett earns in dividends every year over 50% of his original cost basis.
The secret to the purchase and enormous compounding of wealth has been 5-fold:
- A wide moat so he could hold the position for decades (and not pay taxes on gains)
- Pricing power that keeps pace with inflation
- Dividend stability and consistency that ranks the firm as a rare Dividend King
- Increasing dividends that have boosted his return on investment annually
- Original purchase price at a discount to fair value
Can You Replicate Buffett’s Return?
The short answer is yes but likely not with Coca Cola.
At the time he bought Coca Cola, it wasn’t obvious to the broader market what the future would hold. Indeed, it was a turbulent period for the company. But Buffett knew he was buying a company with a sustainable competitive advantage at a discount to its intrinsic value at a time when it was out of favor.
He knew if he stayed patient the force of inflation alone would compound his returns over decades. And if he simply held firm and didn’t sell his gains, he would compound his wealth faster than traders buying and selling, and paying taxes along the way.
Remember, you don’t have to buy the next big thing to make astonishing returns over time. When Coca Cola was snapped up by Buffett it was already a dividend aristocrat. When he bought Apple, the story of the iPhone was almost a decade old – he subsequently made tens of billions in gains. You don’t have to be early to the party, you just have to stick with the position that checks the boxes above, and have conviction in it.