June 15, 2012
Warren Buffett, perhaps the world's most successful investor, has a unique ability to make very sophisticated investments that have created great value for his holding company Berkshire Hathaway (NYSE:BRK.A, BRK.B). Yet as Buffett will tell you, the most successful investments that created the greatest value for Berkshire were those where Buffett chose quality over quantity. Buffett made a huge investment in Coca-Cola (NYSE:KO) in the 1980s. The cost of that investment was roughly $1.3 billion. Today, that stake is worth around $14 billion. What that gain does not reflect are the dividends that Berkshire has received each year from its ownership in Coke. Berkshire owns about 9% of Coke's shares.
At the end of the day, stock prices anchor on earnings growth. The highest quality companies are those with consistent records of profitability. Exciting industries can be profitable, but they invite lots of competition, which ultimately serves to erode profitability. Boring businesses don't invite competition and as such, can generally be counted on for generating consistent profits at an acceptable rate of growth. WD-40 (Nasdaq:WDFC) is a great example. The company makes a boring product that has been in use for decades.
Investing benefits those who are patient and harms those who seek excitement. The passage of time allows for compounding to go to work, which is the greatest value creating force in investing. Investing in quality should be a starting point for all investors.