# What do "cake and underwear" stocks refer to?

Buffett knows that a remarkable surge in Coca Cola or the Washington Post is unlikely, but he also knows that steady growth in these companies is a good bet, so with capital acquired from what the industry calls “cake and underwear” stocks, Buffett is able to invest carefully in riskier ventures without losing the farm, so to speak.

What are people referring to when they say "cake and underwear" stocks?

Why is it called "cake and underwear"?

• Companies which make(or a major part of their business comes from selling) underwear and cakes. Nov 9, 2013 at 19:46

JoeTaxpayer's answer is dead on... but let me give my own two cents with a little bit of math. Otherwise, I personally find that people talking about diversified portfolios tends to be full of buzzwords.

Let's say that Buffett's investments are \$10 million. He would like to earn ≥7% this year, or \$700,000.

He can invest that money in coca-cola//underwear, which might return:

``````* -5% (10% chance)
* +3% (45% chance)
* +5% (45% chance)
``````

Or he can invest in "genius moves" that will make headlines: (like buying huge stakes in Goldman Sachs), which might return:

``````* -10% (20% chance)
* +10% (40% chance)
* +20% (40% chance)
``````

And he makes plays for the long haul based on the expected value of the investments. So if he splits it 50/50... (\$5 million/ \$5 million), then his expected value is 822,250:

``````(\$5M * -.05 * .1) + (\$5M * .03 * .45) + (\$5M * .05 * .45) = \$222,250
(\$5M * -.1 * .2) + (\$5M * .15 * .4) + (\$5M * .2 * .4) = \$600,000
``````

By diversifying, he does reduce the expected value of the portfolio... (He is not giving \$10 M the chance to turn into \$1.5 million or \$2 million for him!). The expected value of that shock-and-awe portfolio with all \$10 million invested in it is \$1.2M. By taking less risk... for less reward... his expected return is lower. But his risk is lower too.

Scale this example back up into the \$100 million or billion range that Buffett invests in and that extra margin makes the difference.

In the context of your original article, the lower-risk 'cake and underwear' investments let Buffett go big on the things that will make 20%+ returns on billions of dollars, without completely destroying his investment capital when things take a turn for the worse.

• Answers should stand on their own. Other than a reference to another poster's answer, (who has apparently changed their username, making things even more unclear), this only obliquely answers the question. Sep 20, 2020 at 20:00

There are some euphemisms that are better known than others. A category of stocks that's suitable for "widows and orphans" would be stocks that are low beta, and perhaps high dividend. Safe (being relative) enough to put a widow's money into.

The term "cake and underwear" appears to me to be a Buffetism. And I'd interpret it to mean,"not tech, not stocks that are either high growth or cyclic, but stocks that make things that have steady demand and that most consumers use."

Google the phrase, only Buffett comes up.

• Buffet's company did invest in Fruit of the Loom. Might be the source of the "underwear". Nov 9, 2013 at 23:05
• Nice catch. It may very well be the source of how he coined such a phrase. Wonder if cake is something one of his companies produces? Nov 9, 2013 at 23:07

I interpret that to mean "vice" stocks and necessities. "Cake" may just be a nicer way of saying "sin" (see The Virtues of Vice Stocks) and includes "lesser sins" like sweets and soda in the group.

"Underwear" likely means things that people are going to buy regardless of the economy - daily staples, which are generally safer stocks.