In 1962, President John F. Kennedy delivered Yale's graduating class of 1962 a piece of advice that all investors should hold dear: "The great enemy of truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive and unrealistic... We enjoy the comfort of opinion without the discomfort of thought."
All too often, investors rely on conventional wisdom. Ideas that may have been true one day are perhaps not relevant today. For those investors who fail to question the myths they have always believed, danger lies ahead. On the other hand, great investment opportunities can stem from the continual questioning of conventional wisdom and the dispelling of myths.
The safety of investing in consumer packaged goods
Take consumer packaged goods (CPG) businesses. These are considered highly defensive in nature. And for good reason: they produce the basic goods that humans need to consume each day and are relatively insensitive to economic cycles. From razors to feminine care products, cereals, soups, dairy products and tissues.
For generations, the CPG space has been dominated by large brands. Think of Heinz, Gillette, Kleenex and others. In 1996, Warren Buffett characterised these sorts of brands as 'The Inevitables.'
According to Buffett: "Companies such as Coca-Cola and Gillette might well be labelled 'The Inevitables'. Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving equipment business these companies will be doing in ten or twenty years... In the end, however, no sensible observer... questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime."
This conventional wisdom has held true for a very long time. But does it remain true today?
At the 2018 Milken Institute Global Conference, the following comment was made by a participant:
"I'm a terrified dinosaur... I've been living in this cosy world of old brands and big volumes... you could just focus on being very efficient and you'd be okay... we bought brands that we thought could last forever... and all of a sudden we are being disrupted in all ways."
That participant was Jorge Paulo Lemann, Brazil's richest person and co-founder of investment firm: 3G Capital. 3G is the second largest shareholder of The Kraft Heinz Company. The largest shareholder is Warren Buffett's Berkshire Hathaway.
We question the conventional wisdom of the safety of the major CPG businesses. By dispelling five big myths about the space, we believe we have uncovered a wonderful investment opportunity for our global equity long-short strategy, called Montaka.