Date
21 January 2017
Warren Buffett saw the popularity, strong brand and ubiquitous distribution channels of Cola Cola as far more important investment considerations than macro-economic factors. Photo: cityam.com
Warren Buffett saw the popularity, strong brand and ubiquitous distribution channels of Cola Cola as far more important investment considerations than macro-economic factors. Photo: cityam.com

Why investors should sometimes look beyond macro issues

Caring too much about macro factors can sometimes prevent investors from profiting from well-run and prospective businesses, columnist Hao Cheng Lin wrote in the Hong Kong Economic Journal.

Hao cited Warren Buffett’s talk at University of Florida on why he invested in The Coca-Cola Company as an example.

The Asian crisis was still pretty much the macro focus at that time but Buffett called it “a short-term issue” and “so it is fairly meaningless”.

“Coke went public in 1919 for $40/share. A year later it was selling for $19/share, a 50 percent drop. There must have been a disaster. Perhaps sugar prices increased and the bottlers were rebellious. Those are short-term concerns. Years later you will see the great depression, World War 2 and nuclear weapons. All these things affected in the short term. But if you ignored the short term, and reinvested the dividends in Coke stock, you’d have about $4,000,000 today.”

In other words, macro concerns as remote as nuclear weapons are often reasons diverting investors’ attention away from asking the most important question for the long term — is it a good and growing business?

“If you are right about the business, you will make a lot of money. Don’t worry about any single event if you have a wonderful business,” said Buffett.

Asian crisis may affect Coca Cola’s businesses temporarily, may be for three months or three years, but the negative impact will definitely not last for, say, 20 years — this was Buffett’s thinking at that time.

A good business is something where you can see a bright future, even though you may not know exactly when that future can be realized, the legendary US investor noted.

The possibility of Fed rate hike is a popular financial topic at the moment. During his Florida University event, Buffett was asked about his views on the issue, but he said once again that he doesn’t fret too much about macroeconomics.

“In investments you have to focus on what is important and knowable. Interest rates are important but not knowable.”

Buffett said Berkshire Hathaway never bought a business or not bought a business because of some macro predictions. He claimed to not even pay heed to such forecasts.

In Coke’s case, Buffett valued a lot more about the firm’s strong brand name and powerful distribution systems globally.

Buffett saw the potential in Coca Cola and began buying in 1988. Drawing on his investment approach, what may be the next great business?

Hao suggested cloud computing.

The service is definitely catching on with the business world. The demand for it can only increase over the long run given people’s growing usage of data services — think smartphones for example.

The trend is going to last regardless of the movement of US interest rates, Hao noted.

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RC

EJ Insight writer

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