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Dec 7, 2008 | Comments

Via Buffet’s Essays on Investing.

Some thoughts on investment.

In 1938, 50 years after the launch of Coke, Fortune wrote an article on the success of the company.

“Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola’s record, but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him.”

The author had a point. Pepsi was gaining ground in the late 30s, doubling profits from ’36-’38 and selling half a billion bottles. Most of America consumed Coke as if it were water. If I was an investor in 1938, I would probably think that it was a reasonable time to sell, at the height of Coke’s popularity and buzz. A one share $40 investment from Coke’s IPO in 1919 until 1938 would have yielded $3,277, a 26% annual return.

Suppose you invested at the height of the Coke “bubble” The same $40 investment in 1938-1993 would have yielded you $25,000, a 12% annual return–quite satisfactory for a product that had purportedly reached market saturation and heightened competition.

What happened? In 1938, Coke sold 207M cases, and in 1993 it increased the volume by 50-times to 10.7B. They increased their product lines, enhanced distribution, and penetrated markets in ways never previously conceived.

Now–when I think about Apple and Google, it seems that the market has already valued the companies as market leaders. It’s no longer about having an information advantage–understanding how special these companies were before the greater public (i.e., I was one of the few users of both companies’ products in 2002; it’s quite a different story now).

Apple was once priced at over $180B in 2007 (now at $90B). A new investor in Apple, just like the 1938 investor in Coke, might have quite a few reservations about a company that has already achieved success.

But the future is full of uncertainty, and Buffet stuck with Coke and many other companies because they had incredibly favorable economics and competitive advantages (think brand name, product attributes, management). This is what drives success in the long-term.

So just like Buffet, I’ll be thinking about Coke-like companies–those that have the strength to dominate even when the market has crowned them as success stories, and the new-comers have officially “missed the boat.”

Any ideas, naturally, are welcome.

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