The Importance of Dispelling Confirmation Bias
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When you are convinced of a certain investment thesis you can bet that a great deal of information can be found in the vast virtual universe known as the Internet to support your notions. This results in confirmation bias. Consequently, I decided to try to find information or notions that will dispel my own viewpoints. Hopefully, you can benefit by following my lead in dispelling any confirmation bias you may hold towards your investments.
Will this restaurant remain on top?
I’ve always maintained that global restaurant chain McDonald’s (NYSE: MCD) will remain a vibrant long-term company translating into superior gains for shareholders in the coming decades. The company and its franchisees operate roughly 34,000 restaurants globally. This gives the company unquestionable purchasing power.
The company’s golden arches increase brand visibility among consumers. Moreover, the company currently provides a 3% dividend yield while you wait for any capital gains.
However, you may argue that McDonald’s best days lie behind it.
Trouble at Mcdonald's
Doing a quick search through the Motley Fool’s Caps community and filtering for underperform picks for McDonald’s yields a whole list of people who would agree with you. One such CAPS investor, Haaldan submitted this bearish statement on Nov 18 of last year:
"McD's sales have dropped worldwide in October, and are beginning to face a lose-lose situation. They can either keep their menu the same and lose the customers that are becoming more and more health-conscious, or they can begin offering healthier meals which will drive prices up and dissuade people from becoming frequent customers."
Partially driven by higher health care costs and the desire to live longer and healthier lives, consumers show a tendency to buy foods and beverages seen as healthier. The fact that beverage company Coca-Cola (NYSE: KO) showed a higher increase in non-sparkling beverages such as juices and bottled water in its most recent quarter serves as evidence.
Haalden’s concerns about price increases definitely warrant attention as McDonald’s showed decreases in comparable store sales of 1.9%, 1.5%, and 1% for January, February and the quarter respectively due to tough economic conditions.
In January, U.S. comparable store sales increased due to the “balanced offering of premium, core and compelling value options” such as “the addition of new Grilled Onion Cheddar burger to the Dollar Menu” give further evidence of consumer price sensitivities.
Any bullish investor in McDonald’s should pay attention to changes in consumer preference and price sensitivities going forward.
Too much science fiction?
My bullish sentiment on entertainment conglomerate Walt Disney (NYSE: DIS) comes from its acquisitions of science fiction and fantasy powerhouses Pixar, Marvel and Lucasfilm. Pixar’s movie wizards really know how to put together an animated flick. Marvel owns a vast universe of beloved comic book characters, some of which have already been seen as major blockbuster films. Lucasfilm owns the iconic Star Wars and Indiana Jones franchises.
However, you may say, “Man this is too much.” Fellow CAPS investor, MightyMinnow would agree with you and had this to say about Disney on March 10:
"America is over entertained. This is where the tax hikes and low wages will hurt."
In 2013 alone, you will see at least two major films based on Marvel characters--Iron Man 3 and Thor: The Dark World. Upon Walt Disney’s announcement of its acquisition of Lucasfilm it said that it plans to roll out a new series of Star Wars films, television shows and merchandise. This could lead the long-term investor to worry about sci-fi market saturation.
Right now, however, customers seem to love Disney’s products. In its most recent quarter its revenue increased 10%, very impressive for a large cap company such as Disney.
Consumers give luxuries such as movies and theme parks a low priority if they see a decrease in their paychecks. A long-term investor needs to remain watchful of these types of trends when studying Walt Disney.
Will this beverage king get assassinated?
Coca-Cola’s trademark red and white represents one of the most recognizable brand names in the world. Its vast distribution system allows the company to efficiently manufacture and distribute its products throughout the world. This company represents the bluest of the blue chips and should be in any investor’s portfolio. Right?
However, on April 9, All Star Caps investor elkwingcaddis submitted the following bearish statement:
"Near its 5 year high. I would expect to see some sales drop as Sodastream picks up market share. I bought a Sodastream and have been using it every day and have not had Coke in my house since."
Consumers gravitate toward SodaStream’s (NASDAQ: SODA) environmentally friendly story. Fewer bottles get thrown into the landfill as SodaStream users utilize reusable bottles to make their sodas. Contrast with Coke bottles that get thrown away every time someone finishes its contents.
Moreover, after reaching a breakeven point for the machine, SodaStream customers can see incremental savings as the syrup represents a lower cost per ounce than the pre-bottled Coke products.
SodaStream’s fundamentals demonstrate continued growth. In its most recent quarter, SodaStream’s revenue increased 34%. Conversely, Coca-Cola’s revenue decreased 1% in its most recent quarter.
Coca-Cola’s size could serve as a hindrance to any future robust growth. Small companies such as SodaStream could eat into Coca-Cola’s market position. Finally, health and environmental awareness could dampen consumer desire for Coca-Cola’s traditional prepackaged sodas.
The Foolish takeaway
When you are convinced of a company’s investment’s merit always search for articles that disagree with your sentiment. Looking at bearish comments at the Motley Fool CAPS community represents another way you can do that. This will lay the foundation for a possible sell thesis in the future should the need arise and take your hard-earned investment capital elsewhere.
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William Bias owns shares of McDonald's, Coca-Cola, and Walt Disney. The Motley Fool recommends Coca-Cola, McDonald's, SodaStream, and Walt Disney. The Motley Fool owns shares of McDonald's, SodaStream, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!