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!