Lessons From The Great Investors… On Coca-Cola And AstraZeneca plc

The “10,000 hour rule” was popularised by the bestselling author Malcolm Gladwell: the idea that, to become an expert at any skill, you need to spend 10,000 hours practising.

Scientists have since debunked the idea, which is just as well, because who wants to spend 10,000 hours reading investing books? But a certain amount of insight is invaluable.

With that in mind, let me present to you the wisdom of two investing heavyweights, and unpack a little of what made them successful.

Coca-Cola and Warren Buffett

Warren Buffett started his first business when he was seven years old. They didn’t have air conditioning in 1937, and in the hot summers when people would cool off on their lawns at night, Buffett began selling soft drinks to his neighbours. His grandfather, a grocery store owner, cut the budding entrepreneur a deal on Coca-Cola (NYSE: KO.US), which was the most popular drinks product.

“I had no inventory, I had no receivables — I had the best business I ever had. But I made one mistake. I didn’t put the money I received into Coca-Cola stock!”

coke 2

This mistake was rectified when, some half a century later, Buffett invested $1bn in Coca-Cola. Ten years passed and that $1bn had turned into $10bn (a “tenbagger” in Peter Lynch speak). To this day he’s never sold any of his stake.

Coca-Cola is the quintessential Buffett investment. The shares were trading at between 14 to 15 times earnings when he began accumulating his holding, which isn’t cheap, but nor is it expensive. What matters most, of course, is the quality of the business, and if the market fails to recognise that quality, and the shares are undervalued, that’s a bonus. Aim for at least a fair price.

What makes Coke a quality business? Due to brand loyalty Coke wields considerable pricing power. Even if the price of Coke rises, the majority of customers won’t seek an alternative.

AstraZeneca and Neil Woodford

Pfizer’s (NYSE: PFE.US) fight to takeover the UK pharmaceutical giant AstraZeneca (LSE: AZN) (NYSE: AZN.US) is now over. It was only since becoming prey to a much bigger shark that Astra began to realise its full value. Pascal Soriot, the chief executive, expects revenues to increase to £45bn by 2023

This target might be a stretch, but even after Pfizer’s final offer was rejected, AstraZeneca’s growth potential remains factored into the recent 4,250p share price. The market shares a good portion of Soriot’s optimisim.

AstraZenecaBut at one point the shares were hated, and Neil Woodford, one of the UK’s most successful fund managers, spotted an opportunity.

Stock markets are driven by humans, and not a single one of us is always right. If you multiply that basis to encompass an entire market what you get are discrepancies. Where others are calm and rational, many are rash and senseless.

At one point the sky was falling in on the pharmaceutical industry. A number of top-selling drugs were going off patent, meaning the blockbuster medicines of yesteryear would face stiff competition from cheap, generic treatments made by smaller manufacturers.

There was a sell off, and AstraZeneca was hit so that its R&D capabilities weren’t even factored into the share price. Now, of course, the drugs pipeline is buzzing.

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Mark does not own shares in any company mentioned.