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Overcoming preconceptions

25 June 2021

Russell Harrop, Head of International Equities

One of the ‘funnest’ things in investing, but also one of the most challenging, is accepting when your own preconceptions are utterly wrong. Looking into why you hold a particular belief could be because it was built on sand or, because although you were once right, now you are very wrong. Things are constantly both changing and staying the same.

We do try and look for businesses where it doesn’t really matter who’s in charge. Warren Buffett reportedly once said, “a ham sandwich could run Coca-Cola.” Head honcho regardless, there must be a reason why a company founded in 1892 to make a fizzy drink that even today gives you more than the World Health Organisation’s recommended daily allowance of sugar is still earning high returns? And, no, it’s not about the secret recipe, as many people can’t tell their Pepsi from their Coca-Cola from their Karma Cola.

It turns out that the marketing machine (allegedly, ‘Coke’ is the second most recognised word globally, after ‘OK’), and the awesome distribution machine (think how many places near you sell Coca-Cola) make a big economic moat around the business. Despite ticking so many of our ‘quality compounder’ boxes, you do not have to dig too deeply for some of the company’s past tactics to raise concerns, and I for one cheered when Mexico successfully introduced a sugar tax in 2014. There is supreme irony that Coca-Cola removed the extremely addictive coca plant from its drinks at the end of the Roaring Twenties when the Great Depression reared its ugly head, only to keep it bathed in sugar, which some studies suggest is just as addictive as cocaine. My held-onto belief was why own such a company, when there are plenty more fish in the sea?

However, like it or not, the solutions to many of the largest problems we as a species face lie with the Coca- Colas, Pepsis, Nestlés and McDonalds of the world. They will have a far bigger impact on obesity if they reduce their portion sizes, freebies, and the salt and sugar content in their products than just about any government initiative. This is not to say that the latter isn’t worthwhile, however: sugar taxes being the best example. One year after their introduction in the UK, the average person consumed three teaspoons less of sugar per week.[1]

Whilst Environmental, Social, and Governance concerns are hugely important, it’s even more important not to throw the baby out with the bath water. Hard as it might seem to overcome your own beliefs (and wrong as it may seem), the so-called villains of the past really might turn out to be the heroes of the future. Redemption is not just a song.

[1] British Medical Journal 2018


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