The Investor

Coke’s Newest Flavor

It's flat and you can't get the taste out of your mouth -- and you wonder if Warren Buffett had a hand in serving it up.

By 12.19.02

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I hear the real estate market is doing better these days than the stock market. I'd take a bad stock market over a good real estate market for one simple reason: liquidity. In the time it takes to read this paragraph, you could buy or sell a couple hundred thousand dollars of stock in any one of thousands of companies. You can predict your price almost exactly and your transaction cost would be far below 1%. Compare that with selling a house.

I am hardly the first person to criticize Coca-Cola's decision last week to stop giving quarterly and annual earnings estimates. Like others who have weighed in on the subject, I think investors need more, rather than less, information. But nobody has seized on the reckless reasoning behind the move. Apart from being a cowardly attempt to shift the blame for Coke's problems from its management to its investors, it cloaks a message that, if imitated by other companies, can ruin the U.S. stock market as the best place to put your money.

It's the Surreal Thing

On December 13, Coca-Cola declared that it will "no longer provide any quarterly or annual earnings per share guidance." Douglas Daft, Coke's CEO, justified the move because "establishing short-term guidance prevents a more meaningful focus on the strategic initiatives that a Company is taking to build its business and succeed over the long-term."

There is a surface viability to Daft's reasoning. Perhaps we are too caught up with short-term results and short-term investing. Should a stock really plummet because the company missed its estimate by a penny or two?

In short, yes. How else should we evaluate a company's future, if not by its ability to set and attain goals? If Coke told you its goals and they sounded ridiculous -- either so conservative that you thought they were wasting opportunities to do better, so risky that they would ruin the company in the process, or so unrealistic that they could never be attained -- you might be justified in selling the stock. And if you thought the goals were the right goals and the company was unable to meet them, shouldn't you be able to draw a negative inference from that? Or at least weigh the reasonableness of the company's explanation for its failure? Forget all that for the future with Coke, and any company that follows its lead.

Remember that, as an investor in Coca-Cola, you are an owner. It is not the job of our employee, Doug Daft, to dictate to us what information to focus on. He can tell us what he thinks is relatively important or unimportant, but I don't like the idea of owning a business and having an employee withhold information from me because he thinks I might "misuse" it.

Is this unnecessary focus on the short-term the fault of investors or Coke's own management? It's no secret that Coca-Cola is one of the worst big companies at hitting its numbers. It has done a terrible job setting goals and, more important, a terrible job selling the syrup. It shouldn't be that hard to work out. The company, along with Pepsi, has pricing power in just about all its markets. It's also the biggest consumer of the materials it needs, so it should be able to predict costs. The goal is to shovel ever more of its liquids down the collective maw of humanity, but the rate at which that happens is pretty predictable. With so much business overseas, currency fluctuations can alter results, but the company can hedge against that by purchasing currency derivatives. I think the real problem here is that Coke is no longer a growth company and its management has failed to acknowledge that. After costing investors billions by raising expectations the company couldn't meet, it has decided, rather than admit the obvious, to keep its mouth shut.

Finally, short-term investors are being made into a scapegoat. That's the real dangerous thing here. Wall Street is easy to blame these days and the idea that professional traders jumping in and out of stocks and wreaking havoc with volatility in such stable companies as Coca-Cola will take hold. This is the worst part of Coke's announcement, because it will probably encourage other companies to do the same thing.

Warren Buffett Is Not Your Friend

The invisible hand of Warren Buffett is all over this one. Buffett is a Coke director, as well as a director at Gillette and The Washington Post Co., which have similar policies. Likewise, Berkshire Hathaway doesn't make projections or give guidance. Buffett is the king of "buy and hold" investing and that's the idea behind all this. Buy and hold. Don't go trading with the latest piece of news.

You do not want to invest along with Warren Buffett, unless you buy some stock in Berkshire Hathaway. Even then, it's an iffy proposition.

First, Buffett is on the friggin' board of directors. He gets access to the company's internal plans and progress against them. Why should he want you to have that information, too?

Second, Buffett is not irrevocably committed to buying and holding. He never discloses his investments unless required by law to do so -- is that something a friend would do? -- but he makes some money on short-term trades. Furthermore, he'll dump an investment he doesn't like. He bailed out of US Air, Disney, and McDonald's before they ran into their recent troubles

Finally, if everybody thought like Buffett, and every company operated like his company, the U.S. equity markets would die as a source of investment. If everybody had the philosophy of buy-and-hold, how could you ever sell a stock?

If everybody thinks the same thing and has the same goals, the liquidity of the stock market disappears. We should want day-traders and short-sellers and momentum-players and hedge-fund-operators and options-traders doing everything they want in the market. The constant buying and selling, along with the conglomeration of so many different objectives, is what determines the market price. All those "short-termers" make it possible for us regular folks to buy and sell quickly, easily, and cheaply. And if there really is something wrong with short-term investing, let's punish those wrong thinkers in the American way: by taking their money.

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About the Author

Michael Craig is a writer in Scottsdale, Arizona.