One of my nerdy enjoyments about studying the capital markets and reading the annual reports of individual stocks is this: the data actually reflects the world as it is, not how it should be.
The US government spends a lot of money advertising against tobacco usage, and yet, when you review the financial performance of firms like Altria, Lorillard, and Reynolds American, you can see that they have a client base that is barely declining at 3% per year, and they are able to offset this dilution with price increases in their products.
To use a less emotionally loaded example, we see the same thing with McDonalds. Watch the movie “Super Size Me.” Listen to any health professional speak on national television. Consumption at McDonalds is universally ridiculed. Read any forum about weight loss, and you will find a snarky commenter say “Put down the Big Mac and get on a treadmill.” Yet, when you look at McDonalds’ financial statements, we see that the profits go up year over year without a hitch. Off the top of my head, I think their cash flow has declined twice in the past twenty-five years. Despite what you read and hear, people vote with their dollars at McDonalds.
I get a similar feeling when I read the annual report of Pepsi Co. The CEO at Pepsi, Indra Nooyi, has spent the past couple of years advertising heavily in an attempt to promote Pepsi’s healthier options. Despite this heavy promotion, the bulk of Pepsi’s profits still come from soda and potato chips and the “junk” portion of their portfolio. In fact, that is partially why Pepsi has been losing the “Cola Wars” to Coca-Cola in the past ten to fifteen years. In my opinion, Pepsi management has been focusing on what they think their customers should want, rather than what they actually want. The current Coca-Cola management team does not let the tail wag the dog and they actually let customer preference dictate their current strategies, and that can partially explain their superior performance.
When I look at the profitability of certain companies, I appreciate the fact that they reveal what people actually want, as opposed to what they are told to want. Take something like beer and liquor. Probably more so than anything else, alcohol has led to the downfall of what could have otherwise been very great men. Yet, when we review the financial statements at Anheuser Busch Inbev, Diageo, and Brown Forman, we can see that people across the world love themselves a good drink.
For me, this is something that makes investing fun. The profitability of certain companies give us accurate snapshots into how human nature actually is, as opposed to the promotion of what it should be. That is why I enjoy reading financial statement. While mainstream news sources purport to give us their view of the world, a quick look at the financial statements of certain companies reveal what the world actually looks like, as is. The profits at Pepsi, McDonalds, Anheuser-Busch, and Reynolds Tobacco give us glimpses of how people actually choose to allocate their capital based on what is important to them and what they prioritize in life, and I love that investing gives us this window reflection into the differences between how we are told to behave and how we actually behave. Business results provide a beautiful insight into human nature, and I appreciate trying to find that unblemished look at how people choose to conduct their lives.
Originally posted 2013-06-14 13:16:31.