Warren Buffett’s 3 Best Investments & Lessons From Them

Warren Buffett’s track record since taking control of Berkshire Hathaway in 1965 is one-of-a-kind. While most investors are familiar with Buffett’s investment philosophy - buying competetively advantaged businesses run by honest management at a fair price - some of Berkshire’s early investments are less known.

In today’s newsletter, we take a step back in time to review some of the best investments Buffett has made on behalf of Berkshire shareholders. These are not defined by sheer dollar returns (Berkshire’s investment in Apple holds that title), but rather by how these companies have contributed to Buffett’s evolution as an investor and how they have shaped the portfolio Berkshire owns today.

Government Employees Insurance Company (GEICO)

One of the first changes Buffett made when he took the reins at Berkshire Hathaway in 1965 was to move away from the dying textile business. Instead, Buffett focused his efforts on the investment portfolio. This required significantly less capital than the New England textile mills that Berkshire owned and the dollar returns from the portfolio had been far superior in the short time span since Buffett took over. 

The year of 1967 marks a monumental shift in Berkshire’s investment portfolio. With the purchase of National Indemnity that year, Berkshire was now involved in the insurance business. The National Indemnity purchase helped Buffett appreciate the benefits of owning insurance companies outright as part of an investment portfolio for one simple reason - float. Because premiums are paid by policyholders at the beginning of a policy period, insurance companies receive cash before they have to pay any claims. Simply put, insurance companies can earn a return on this cash, or float. And with Buffett’s unmatched ability to invest this float, Berkshire has made a lot of money throughout the years.

That brings us to GEICO. Buffett had long admired GEICO, but it was not until 1976 that Berkshire started buying with both hands. GEICO had a long history of profitable underwriting, meaning that the company charged more in premiums than they normally had to pay back in claims. That increased the float over time. By 1994, Berkshire owned 51% of GEICO - and agreed to buy the rest of the business for $2.3 billion by the end of the year. The float generated from GEICO’s business has been a huge contributor to Berkshire’s investment success ever since. 

The Coca-Cola Company

Buffett’s fascination with Coca-Cola, both the company and its products, is well known. However, Berkshire’s investment in Coca-Cola was for reasons beyond just the competitive advantages the company had built as the soft drink of choice across the world. 

Sure, Coca-Cola was an easy-to-understand business with strong returns on capital and favorable long-term prospects - just what Buffett looks for in a business. But Coca-Cola was not performing well in the 1970s due to a variety of issues with bottlers and regulators. That changed when Roberto Giozueta was appointed CEO in the early 1980s to handle these issues. Under Giozueta’s leadership, Coca-Cola cut costs and divested parts of the company to focus on the core business. By doing so, the company would earn better returns on equity and get margins back to where they had been before the issues started more than a decade prior. 

It actually was not until 1988 that Buffett and Berkshire purchased its first shares of Coca-Cola. Berkshire continued to buy until it was a ~1 billion position in 1989. That represented about 6% of Cola-Cola and 35% of Berkshire’s stock portfolio. By then, Giozueta had improved ROE from 20% in the 1970s to 31% in 1989. Operating margins had expanded from 13% to 19%. Clearly, Coca-Cola was led by extremely capable management.

Buffett paid on average around 15x earnings for Coca-Cola. That is an expensive price if you study most of Buffett’s purchases leading up to that point (and even as valuation multiples on U.S. stocks have increased since then, Buffett has rarely paid more than 15x earnings for any business.) 

What some investors miss out on regarding Berkshire’s purchase of Coca-Cola is that Buffett did not invest simply because it was a wide-moat business. Regardless of the price, he waited until it was led by the right CEO who could allocate the capital in a way that improved returns and distribute leftover cash to shareholders instead of getting into new ventures with lower returns. And when Buffett realized this was the right combination of a predictable business with by competent management and at a fair stock price, he loaded up the boat and made Coca-Cola the biggest position in the Berkshire portfolio. There is a lot of lessons for investors in there.

As a fun fact, Berkshire will receive about $770 million in dividends from Coca-Cola in 2024 alone on the ~$1 billion Buffett invested in the late 1980s. 

See’s Candies

The California chocolate maker has been praised countless times by Buffett and Munger on Berkshire’s annual meetings. However, See’s impact on Buffett’s investment philosophy is possibly an undercommunicated part of the story. When Berkshire acquired See’s in 1972, Buffett was still in the early stages on his career. Up until that point, Buffett had largely followed in Ben Graham’s footsteps by buying struggling companies that had fallen out of favor with the market at a very cheap price, so-called “cigar butts.”

See’s was anything but a cigar butt. Berkshire paid ~$25 million for the company - which at the time of purchase was more than 3x book value and 12x earnings. That was a rather expensive price to pay back then, and Charlie Munger has later referred to this as the first time Buffett and Berkshire paid up for quality. At the 1997 Berkshire annual meeting, Buffett said “If we hadn’t bought See’s, we wouldn’t have bought Coke.”

This tells us why the See’s Candies acquisition represented a seismic shift in Buffett’s career. Even though See’s does not operate on a scale comparable to the largest candy makers, the company has had a strong foothold in California since its early days and it has always been viewed as a premium brand. This brand equity has allowed Berkshire to continuously raise prices without having to inject more capital into the business. Today, See’s Candies generates more than $80 million in annual net income (more than 3x what Berkshire paid in 1972) that Buffett can retain and allocate on behalf of Berkshire shareholders.

Conclusion

• Buffett and Berkshire have purchased a great deal of companies over the years, both outright and as part of the common stocks portfolio. However, only a handful of these can be described as game-changers; GEICO is one of those because of its float that has been a huge contributor to Berkshire’s returns. 
• Buffett’s investment in Coca-Cola is a lesson in patience and a reminder to amateur investors that management matters. It also shows Buffett’s willingness to bet big when given the right combination of an outstanding business, competent management and the right price. Coca-Cola has been a massive long-term winner for Berkshire since the first purchase in 1988. 
• See’s Candies was one of Buffett’s first moves away for Graham’s cigar butt approach. It was also the start of his partnership with Munger who convinced Buffett to “pay up for quality.” That formula has contributed to Berkshire’s success over more than five decades. See’s is still throwing of large amounts of cash annually that Berkshire retains and allocates on behalf of shareholders with little need for re-investments. 

This Newsletter's Author

This newsletter was written by Jørgen Pettersen. You can find him on Twitter/X.

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