What Is Warren Buffett Teaching Our Kids?
Dec 4th 2013 10:21AM
Updated Dec 4th 2013 10:22AM
Neatly nestled between episodes of Animaniacs and Pound Puppies, Warren Buffett is quietly expounding the fundamentals of finance to the 7-year-old and older set in The Secret Millionaires Club, an animated series on the Hub Network. The cartoon features the Oracle of Omaha as himself as he helps his squad of four kids with fundraisers, business plans, and other financial challenges. Check out this YouTube video of Warren doing the voice-overs with the kids.
What can you learn from Warren?
So far, the animated Mr. Buffett (who somewhat resembles Mr. Magoo) is not advocating individual stocks, his own company Berkshire Hathaway, or even the stock market per se. Rather, his consistent message is that saving -- even just a little saving -- will serve you well in life. He also teaches kids to spot strong businesses and to appreciate the importance of pricing, customer service, margins, and advertising, among many other topics.
Berkshire Hathaway's largest holdings -- Wells Fargo and Coca-Cola -- show that Buffett practices what he preaches. Buffett's most famous holding (and favorite daily beverage) is Coca-Cola, but at 16.5% of his portfolio, it represents a smaller stake than his largest holding, Wells Fargo, which accounts for 20.8% of his portfolio.
Mr. Buffett could be describing Coca-Cola in episode 2 of Secret Millionaires Club. The kids are trying to make a car wash successful. Mr. Buffett advises the kids to advertise: "Every business needs to promote itself ... to distinguish itself from its competitors. When a business advertises, it builds its brand and gains the larger share of the customer's mind." Coca-Cola regularly ranks among the world's most valuable and widely recognized brands.
Coca-Cola has been fairly flat over the last year, with declining U.S. soda consumption impacting both Coke and rivals including PepsiCo. Coca-Cola, unlike PepsiCo, doesn't have a massive global snacks business to offset dropping soda sales. However, Coca-Cola has plenty of noncarbonated beverages that it could advertise more to mitigate slacking soda sales.
Coke stock offers a 2.8% yield and a trailing earnings multiple of 20.8. A respectable payout and a reasonable valuation are two of the reasons Buffett has so often said Coca-Cola is a stock he would hold forever. As fellow Fool Isaac Pino points out, Buffett used to deliver Coca-Cola as one of his youthful enterprises.
Mr. Buffett specifically covers price versus value when comparing brand-name "Happy Cola" with generic "Value Cola" and showing how mind share is created in episode 16. As the SMC members learn:
The reason Happy Cola is so successful is the public trusts it on price and value. ... Mind share is when a product is so well-known and established that it becomes the first brand anyone thinks about ... maybe the only brand. Remember: Price is on the price tag; value is in the eye of the beholder.
Mt. Buffett also stresses that a company needs to associate its image or brand with a good experience, making people happy. Indeed, one of Coca-Cola's most famous slogans was "Open Happiness."
"A successful business never cuts corners"
In episode 17, "Tough Cookies," Mr. Buffett counsels the Secret Millionaires Club on how to better prepare for a bake sale after their "subpar" cookies don't sell. Subpar, subprime -- these words once applied to Wells Fargo, charged with targeting minorities to take on expensive subprime loans. However, in 2010, Wells Fargo exited dangerous subprime loans. Since then, net interest income has stayed fairly stable at Wells Fargo compared to its rivals.
In the U.S., Wells Fargo is the largest commercial mortgage lender and one of the largest residential lenders. The company recently completed its $6 billion purchase of Eurohypo UK, a European retail lending operation, in order to expand overseas operations. European expansion is just another reason to own Wells Fargo.
As Mr. Bufett says: "A successful business is always diligent. ... Do the little things right every day, then the big things will follow." This seems to be working for Wells Fargo: It has a strong bottom line with a net profit margin of 24.4%. Fellow Fool Patrick Morris makes the argument that Wells Fargo leads its sector in revenue generation through traditional interest income, as well as refinancing and other bank fees.
Lastly, like most of Buffett's holdings, the company is shareholder-friendly, paying a 2.7% yield with a three-year dividend growth rate of 71% as the payout returns to pre-crisis levels. Being a well-known centenarian brand with locations throughout the U.S. makes it a typical Buffett pick.
"The more you learn, the more you'll earn"
That's the line with which Mr. Buffett closes every episode, and it's just as relevant for adults who want to learn how to invest like him. Covering everything from leverage to supply and demand, Mr. Buffett offers an easily understandable way to discuss finance with your kids. An added dividend: They're pretty fun to watch.
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The article What Is Warren Buffett Teaching Our Kids? originally appeared on Fool.com.AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Wells Fargo. The Motley Fool owns shares of Coca-Cola and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.