Thursday, February 16, 2017

Should I Buy Coke (KO)? And a Michael Lewis book recommendation.

This is a trick question, I already own KO.   I just finished an interesting book by Michael Lewis entitled "The Undoing Project:  A Friendship That Changed Our Minds.."  Mr. Lewis is the author of some really interesting titles including:
  • The Big Short
  • Liar's Poker
  • Flash Boys
  • Moneyball
  • Boomerang
  • The Blind Side
In the undoing project, he tells the story of two prominent Israeli Psychologists, Daniel Kahneman and Amos Tversky, and their work on how humans think and make decisions.

One of my takeaways is that humans aren't very good at making data driven decisions, and are influenced strongly by bias.  Among the many biases discussed, was framing.

"Should I Buy Coke," feels very different that "Should I sell Coke," but it shouldn't.   The data is the same in either direction, yet, I've owned Coke now for nearly five years, and I've grown attached to its brand, history, dividend growth, and I really don't want to sell my shares.

Yet, if you ask me whether you should invest in Coke today, I would likely tell you no; there are better opportunities out there based on today's valuation, Coke's pathetic growth, and the long term prospects of sugary drinks overall.  And while the dividend is okay, heck, you get a bigger dividend from several utilities, and they are growing faster than Coke!

Coke's stock has increased around 20% over the past 5 years, but trails the S&P 500 over that same period by a wide margin, which is pretty disappointing.

Here is the FastGraph for KO:

It's suffered four straight years of declining earnings and revenue, is moderately overpriced today, and is forecasting another 2% decline in earnings for 2017... not much to get excited about.

Thus my bias, if I know based on the data that Coke is not a great investment, and that I can name several better opportunities (SO, DUK, PFE, STAG to name a few), SO WHY DON'T I SELL?  I would never buy a stock with the fundamentals of Coke today....yet I hesitate to sell for some reason. Another concept in the book is the strength of the emotion "regret."  If I sell, and something good happens to catalyze growth at Coke, I will suffer regret, which would be much worse than if I simply stick with Coke, and nothing good ever happens.

It seems we humans prefer the slow loss of our investment over many years, or long periods of underperformance, to the threat of a sharp dose of regret.

Food for thought.


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