raytoei (96.73)

Value Investing Works!

January 10, 2008 – Comments (0)

(This is my entry to the TMF Inside Value Newsletter contest) 

this entry is void for 2 reasons: I am late and also, I am an alien non-resident.

But I do have this to share:

Value Investing works. I bought Coca-cola around $40 to 42, way back in early to mid 2004. Back then, just about everyone hated KO, it was the peak of the Atkin's diet and carbonated drinks was on the decline and Coke lost Gatorade to Pepsi. Well it was cheap but not screaming cheap, the P/E ratio was in the twenties. However what made me put in a large chunk of my savings was this:

a) Over  a 10 year period, Coca-Cola was cheap by historical metrics. Way back in the nineties, everybody loved Coca-Cola and it sold to high valuations but in 2003/2004 nobody liked it at all, and the restructuring seemed further and further away from achieving results. However, if we are patient, this form of Relative Value Arbitrage works, especially if the company is a stable strong cash generator which Coca Cola was. And we had to do was to buy it cheap and wait for the problems to be fixed. At the most pessimistic time for KO, it was still generating margins most companies would die for (gross margins at 63 ~65%) and generating 5bn of cash every year.

b) The new CEO, Neville Isdell was no-nonsense and did not sugar-coat the problems in Germany, Philippines and the slow-growth North America. Let me quote you Q4 Letter to shareholders:

"We are not satisfied with our performance in 2004. By most measures, we did not perform to our potential or the expectations of our shareowners. On the whole, I believe 2004 will be remembered as the beginning of an important transition for The Coca-Cola Company. We are making the necessary course correction that will enable us to fulfill our enormous potential, accelerate growth and create value for shareowners over the longterm."

This smacks of level 5 leadership, someone who can paint the reality of the problems confronting the company and have a road-map to fix it. I was hooked.

c) Lastly, I did have a bit of help from Buffett's ex-daughter in law, Mary Buffett. I bought about 20 copies of Buffettology Workbook for under $2 each in a clearance sale, and in the book, there were alot of examples about identifying a good franchise and Coca-cola was featured in many of the examples. Well, the book has been largely discredited by hardcore Buffett followers, but I really liked the book, I still use the basic stuff in there: Look for good companies that consistently generate a lot of cash with little debt and high margins and then Buy them Cheap

As a epilogue to this rambling,  my current 2nd largest Buy and Hold stock is....Coca-Cola, and I am sitting on gains of 59.76%. Isdell has announced that the restructuring is largely complete, and that he is stepping down as CEO. The world suddenly decided late last year that it like Coca-Cola at $65 rather than $40.

raytoei

ps. my largest buy and hold stock is....Berkshire Hathaway.

pps. you can read up on my 2007 performance here:
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=28164&t=01007210973180217446