Investing Idol Worship: The Kraft Heinz Lesson
When Kraft Heinz reported earnings last Friday (February 22), they shocked markets with a trifecta of bad news - stagnant operating results, a massive goodwill impairment and mention of accounting irregularities being investigated by the SEC. When they followed up by cutting dividends, the stock collapsed more than 25%. The shock was amplified for investors because of the pedigree of the two lead investors in the company - Berkshire Hathaway and 3G Capital, both with reputations for investing acumen and shrewdness. If you needed a reminder that Warren Buffett is human (though he is been open about that truth for a long time), makes mistakes and has investing blind spots, you got it. More generally, though, no investor, no matter what his or her track record, should be put on a pedestal and followed blindly. In the session, I also do an updated valuation of Kraft Heinz, which will guide my actions, but if you buy into the broader lesson, should not guide yours.
Slides: http://www.stern.nyu.edu/~adamodar/pdfiles/blog/KraftHeinz.pdf
Blog Post: https://bit.ly/2NyBQuT
When Kraft Heinz reported earnings last Friday (February 22), they shocked markets with a trifecta of bad news – stagnant operating results, a massive goodwill impairment and mention of accounting irregularities being investigated by the SEC. When they followed up by cutting dividends, the stock collapsed more than 25%. The shock was amplified for investors because of the pedigree of the two lead investors in the company – Berkshire Hathaway and 3G Capital, both with reputations for investing acumen and shrewdness. If you needed a reminder that Warren Buffett is human (though he is been open about that truth for a long time), makes mistakes and has investing blind spots, you got it. More generally, though, no investor, no matter what his or her track record, should be put on a pedestal and followed blindly. In the session, I also do an updated valuation of Kraft Heinz, which will guide my actions, but if you buy into the broader lesson, should not guide yours.
Slides: http://www.stern.nyu.edu/~adamodar/pdfiles/blog/KraftHeinz.pdf
Blog Post: https://bit.ly/2NyBQuT
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Kraft became a horrific train wreck from years of advice from corporate parasites. They have actually withdrawn from most of the world. Retailer private labels and competitors have chiseled both Kraft and Heinz….
thank you for your content
Thank you sir, i need your help to learn and understand those normal distribution graph you made and then did valuations if u can post some learning videos on that it will be helpful for me.
"To have a stronger faith you constantly have to be willing to question it." – Aswath Damodaran
KHC collapsed for one reason.
They never counted on their middle class customers refusing their cancerous chemicals and synthetic diabetic sweeteners in the products
Thank you for all this wonderful content! Regarding the Buffet effect on his fanatics, I have a great deal of respect for the Oracle of Omaha but the whole deal around the Amazon shares owned by B.H. is to me a very interesting topic around investing psychology. I think many smart people choose to deceive themselves by ignoring the fact that it was not Mr. Buffet himself who bought the stocks but rather one of the managers under him, then in a B.H. annual meeting he came out and defended his subordinate's decision to buy Amazon, but some people don't see the context in which Buffet tried to defend the acquisition: for a long time he has been no longer just another investor, bur rather the leader and the face of Berkshire Hathaway. Not easy to come out and say your trusted employee went bananas and did something counter to growth or value investing. How would it have affected B.H.'s stock price if Buffet had been brutally honest instead of trying to cover for his people? Anyway, that's just my humble opinion. Again, thank you for sharing all of this!
Kraft has just failed to adapt to changing consumer preferences. People no longer eat cheese whip – shock… Moreover, surely margins EBITDA margins must surely fall if they are to adapt. Aggressive cost cutting by 3G has led to lack of innovation and marketing leading to brand erosion. Seems to be short term margin maximisation (light A&P, R&D exp) at expense of future pricing power?
For the simulations, I used Crystal Ball, an Oracle product.
Does anyone know What software was used for the probability distributions and valuation range?
The core issue is that we need to invest some time capital to learn how to manage ego what is the obvious outcome Prof. Aswath rightly deduced the logical steps in order to avoid deviation from what it should be. Ego is not a emotional behaviour directly relates to any age. It is available in all ages. Basically, I do totally agree with Prof. Aswath that our judgements using our senses do have limitation .