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Business are compacted creatures. They are not always what they seem on the surface. For example, McDonalds’s is seemingly a fast food company, but it is real business lies in real estate. Similarly, Starbucks is coffee chain, but it is real business is a cheap source entertainment and socializing, along with serving as a market shift office and meeting room for people.
As a business owner, you need to drill deep into how a company makes money. The business environment that companies’ face is challenging and over time almost all of them have to adapt or they die out. Even a company that is in a seemingly simple business such as Coca-Cola has to adapt. In Ccs-Cola’s case, it easy to think they could simply keep producing Coca and leave it at that. However, with people becoming increasingly conscious of the environmental impact of their choice and becoming more health conscious, how much longer can Coca-Coals rely on sugary syrup?
This is why Coca-Cola owns more than 500 brands worldwide. It is also shy PepsiCo long ago diversified its business by purchasing Frito-Lay, which is the world’s largest producer of snakes. If a soft drink manufacture faces such challenges, imagine the challenges that a more sophisticated business faces. As an inceptor, you do not need to figure out how companies should react to such environment, but you do need to know where the business makes its money.
PepsiCo share holder who do not understand that their dividends come largely from the snack business does not understand how their company works. Why is it so vital for you to understand the business? After all is not that management’ job? It is important for you as an investor to understand it too because this prevent you from selling or buying at inopportune moments.
Millions of Coca-Cola shareholders sold their shares after market crash of 1897. Warren Buffett instead went out and bought as much of the company as he could lay his hand on. Today he owns close to 10% of the company, having paid $1.8 billion of tis stake, as a result. Berkshire Hathaway earns $640 million in Coca-Cola dividends alone every year.
Berkshire has earned over seen billion dollars in dividends from its investment in Coca-Cola. That is jus dividend. It does not include capital gain from the 1750% rise in Coca-Cola’s stock since 1989. What is the key behind such monstrous gains? Buffett understood how Coca-Coca makes money and the advantageous way it had structured its relationship with its bottlers.
To understand a business, you need to understand the sector it operated in and how the economics of that sector work. Some sectors are allergic to money. For example, with the exception of companies like south west airlines, the commercial airline business has long been a terrible place to invest money.
Intelligent investors understand that great companies are still subject to their industries’ economics. Sometime it is better to invest in shovels than dig or gold yourself.
