Five years ago, Coca-Cola stock hit a high of $45 per share. Right now, the stock trades at $47.85. When any stock does not appreciate in price for five years or more, the investor class often allows their analysis to succumb to recency bias. That is to say, if Coca-Cola had the exact same business that is operating now but the price of the stock was, say, $80 per share, the analysis of Coca-Cola’s present circumstances would be far rosier than is currently on the case.
In theory, we should be able to avoid recency bias by reminding ourselves that the value of any business today is contingent upon the net present value of all future profits that the business generates capitalized at some multiple on the end date of your contemplation period. Remembering this lesson has served the investors in iconic companies such as Johnson & Johnson and the … Read the rest of this article!
A justifiable but ultimately flawed investing impulse is to rely solely on the numbers we see from a company rather than thinking about the qualitative aspects of the investment itself. Some of this reasonable. Thinking about the quality of earnings is hard whereas current numbers are easy—anyone with an internet connection can pull up a spreadsheet and see Exxon’s $0.63 quarterly dividend backed by profits that are usually 4-5x as much. It’s much harder to look at the quality of those profits—personally, I get excited seeing the fact that Exxon is acquiring 21% more in reserves than it drills out of the ground, and I like to see the company’s slow transition from relying on liberty-suspending-mentally-unhinged third-world despot to do oil business, and shift some of that work to Canada.
My guess is that a lot of this has to do with the unquantifiable nature of earnings quality—okay, we all … Read the rest of this article!