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Discovering Value

What Investors Can Learn From Food

Our eating habits are susceptible to biases and manipulation -- just like our investing decisions.

At one time or another, nearly all of us make a blunder of such monumental proportions that we ask ourselves, What was I thinking? Perhaps we relaxed our price discipline, or we let a stock holding get bigger than it should have been because things seemed to be going so well for the company. Or we exposed ourselves to risks that we’d been warning others about for years.

The culprit behind many of our sorriest decisions turns out to be our suscep­tibility to a wide range of behavioral biases that can short-circuit rational thinking. We lock on recent events. We follow the crowd. We become overconfident. We ignore evidence that doesn’t conform to our beliefs or expectations. The answer to the question “What was I thinking?” is most likely, “I wasn’t.”

Lousy choices. All this came to mind while reading the book Mindless Eating. Its author, Brian Wansink, is an economics professor at Cornell University who specializes in the nutritional decisions people make. Our eating habits, Wansink writes, are sus­ceptible to biases and manipulation -- just like our investing decisions. In fact, he says, most of the 200-plus choices we make every day about food are “mindless” and ill-advised.

Wansink says evolution has stacked the deck against healthy eating, hard-wiring us to prefer the taste of fat, salt and sugar. At the same time, food has become ever more plentiful and access­ible. The result, he argues, is that how much we eat has less to do with how hungry we are and more to do with other influences, from how the food is served to whom we eat it with.


Mindless Eating cites several examples of these influences: Office workers ate nearly three times more chocolate when bowls of sweets were on their desks rather than 6 feet away on a file cabinet. People eating with a friend consumed 35% more than when they ate alone. And they consumed 22% more calories when eating from a 12-inch plate than when they ate from a 10-inch plate.

Wansink argues that simple disciplines can go a long way toward minimizing dumb decisions. For example, he suggests keeping healthy snacks nearby and devoting half of your plate to salad or vegetables. He also recommends eating from smaller plates. Discipline is important in investing, too. Clear and concise rules -- for example, never invest in a business you don’t understand, or make no decisions in the heat of the moment, or never let a position get too large -- can do wonders for your performance. On the subject of food, one idea that meets all our criteria today is Kraft Foods (symbol KFT), the world’s second-largest food company. We owned the stock before Kraft’s recent agreement to buy Cadbury, the British candy company, and we believe the deal makes Kraft shares even tastier.

Cadbury generates roughly 40% of its sales in fast-growing emerging markets, but its investments in those places have depressed profit margins. Meanwhile, a number of product and marketing missteps, high commodity costs, and a need to spend more on research and development to catch up with rivals have hurt margins at Kraft. But as Cadbury’s investments in developing markets start to pay off, Kraft’s short-term operating problems go away, and the combined company takes advantage of increased scale and marketing clout, the new Kraft should sport margins in line with other brand-name food companies -- such as Campbell Soup (CPB), General Mills (GIS) and J.M. Smucker (SJM).

By 2012, we think, Kraft will earn $2.70 to $2.90 per share. Assuming a price-earnings ratio of 15 -- a conservative multiple, we believe, for a company of this quality -- the stock would trade in the low to mid $40s. That’s a healthy gain from the mid-April price of $30. In the meantime, investors get to feast on a robust 3.8% dividend yield.

Columnists Whitney Tilson and John Heins co-edit Value Investor Insight and SuperInvestor Insight. Funds co-managed by Tilson own shares of Kraft Foods.