No. of Recommendations: 19
I admire Buffett's viewing of return on original investment when speaking of Coca Cola and other long-term holdings. It has helped us understand holding on to our positions for a long time.
Funny, that, it's one of the things Buffett says that I have never understood. Sure, Coke is providing a great dividend return based on Buffett's original purchase, but that will usually be true of a company you have owned for decades. It says very little about whether it's a good investment to hold onto it now, or even whether it has generated a good average rate of return.
Many of us have doubted the wisdom of holding onto KO for the last quarter century, and it turns out that (in retrospect) it would have been much better to ignore the high dividend return and sell it, almost any time in recent memory (including, probably, now.) Holding on to share holdings almost forever only makes sense if the thing you are holding onto makes you more money than selling it and buying something else. Errors of omission can be just as bad as errors of commission (the ones involving new transactions and their broker commissions, right?)
Sure, a great company you bought for 18x earnings shouldn't be sold just because it's now trading at 25x, and especially not if you're just waiting for a general market correction. But buying Coke at $60, at 25x earnings that have been flat for years, doesn't make sense to me, and apart from the tax considerations, it doesn't make a lot more sense to hold onto it, just because its annual $1.76 dividend now represents more than 50% of the $3.25 you happened to have bought the shares for almost 50 years ago.
I can understand boasting about it, in a way, I'd probably do the same, but it doesn't seem like very solid reasoning.
Regards, DTB
