Why Shouldn't I Buy McDonalds Or Coke?

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Why Shouldn't I Buy McDonalds Or Coke?

Postby SpaceSashimi » Wed Jun 26, 2013 2:04 pm

As a young investor it just occurred to me that if I plan on holding my stocks for some time why shouldn't I invest my money in some stocks like Coca - Cola or McDonalds? Is this a no brainer? IS there any foreseeable downside to investing in these massive companies that are main stays in our world at this point?
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby petercooperjr » Wed Jun 26, 2013 2:08 pm

Of course you should invest in them. They're part of the market. The question I think you're asking is whether or not you should invest in them *more* than their weight in the overall market. If you think large-cap "massive companies" are solid and should be the base of the stock part of your portfolio, that seems perfectly reasonable. But why not invest in all of them (via a Large Cap index) rather than just a couple, and that way in case something happens to one of them you're not completely hosed?
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby neurosphere » Wed Jun 26, 2013 2:16 pm

What about microsoft and apple? Aren't they giant companies that are also "mainstays"? For that matter, you have overlooked Exxon, google, GE, Amazon, Pfizer and Berkshire Hathaway.

Can you tell me why McDonald's and Coke will do better over your lifetime than any company on the list above? Or any other stock available in the US? What about the rest of the world? Don't you think Samsung (or Nestle, or Toyota, or...) has better potential for appreciation that Coke? Why or why not?

As for your question about downsides...Consider that Kodak and General Motors were also mainstays, and their stocks became worthless.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby medstudent12 » Wed Jun 26, 2013 2:17 pm

SpaceSashimi wrote:As a young investor it just occurred to me that if I plan on holding my stocks for some time why shouldn't I invest my money in some stocks like Coca - Cola or McDonalds? Is this a no brainer? IS there any foreseeable downside to investing in these massive companies that are main stays in our world at this point?


This is why. Tomorrow's mainstays will likely be different. Why buy two companies when you can buy all of them?
Last edited by medstudent12 on Wed Jun 26, 2013 2:46 pm, edited 1 time in total.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby runner9 » Wed Jun 26, 2013 2:22 pm

I read the the title to mean to actually eat.

Answer: they're not healthy, etc. I have some bad eating habits but haven't had McDonalds or Coke products in over a decade. (ice cream's a whole different topic!)

If, and only if, some attitudes change nationwide these companies could be in trouble. Will it happen? I have no idea which is another reason for index funds :D
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby cheese_breath » Wed Jun 26, 2013 2:23 pm

Not to mention U.S. Steel. Check out the Fortune 500 list for past years and see how many names are still great buys. I gave it an initial setting for 1960, but you can change the year.

http://money.cnn.com/magazines/fortune/ ... full/1960/
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Clearly_Irrational » Wed Jun 26, 2013 2:31 pm

In order to sufficiently diversify away stock and sector specific risks you'll need to hold a minimum of 30-50 stocks. By the time you have that many, why not just buy an index fund instead?
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby barnaclebob » Wed Jun 26, 2013 2:32 pm

How about Kodak or Sears?
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby YttriumNitrate » Wed Jun 26, 2013 2:38 pm

runner9 wrote:Answer: they're not healthy, etc. I have some bad eating habits but haven't had McDonalds or Coke products in over a decade. (ice cream's a whole different topic!)


You sure about that? Coke products now include: Fanta, Dasani, Minute Maid, Simply Orange, VitaminWater, Fuze, Honest Tea, Odwalla, and PowerAde.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Simplegift » Wed Jun 26, 2013 2:39 pm

Take the lesson from this chart below. Most individual large U.S. companies (the blue lines) that were once major components of the Dow Jones Industrial Average have completely disappeared over time — but the composite average of all the companies in the DJIA (the tan line) has survived and prospered. It pays to diversify across the broad market!

Image
Source: Financial Graphic Art
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Call_Me_Op » Wed Jun 26, 2013 2:40 pm

SpaceSashimi wrote:As a young investor it just occurred to me that if I plan on holding my stocks for some time why shouldn't I invest my money in some stocks like Coca - Cola or McDonalds? Is this a no brainer? IS there any foreseeable downside to investing in these massive companies that are main stays in our world at this point?


There was a time not long ago when Enron corporation was considered a main stay of our world.

http://netwmd.com/articles/article202.html
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby ogd » Wed Jun 26, 2013 2:41 pm

SpaceSashimi wrote:As a young investor it just occurred to me that if I plan on holding my stocks for some time why shouldn't I invest my money in some stocks like Coca - Cola or McDonalds? Is this a no brainer? IS there any foreseeable downside to investing in these massive companies that are main stays in our world at this point?

The answer is diversification.

Both your companies have specific risks, i.e. they could go down while the rest of the market stays up. You could even come up with a fun scenario that takes both of them down at the same time (bad interaction between coke and hamburger, lawsuits galore? obesity epidemic?). A concentrated portfolio is inherently more risky / volatile that a diversified one, which only has to worry about risks to the entire economy.

Concentration risk is one of the few risks that doesn't get rewarded in the market; to understand why, imagine a group of investors that hold concentrated positions in one company each, vs. another group where each investor is diversified among the same companies. Their portfolios are the same in the aggregate and so are the returns -- so the investors in the first group have more volatile portfolios that do not reward them adequately.

If you think risks don't matter, imagine that instead of holding an asset that is 20% more volatile, you buy a less volatile asset with the same expected returns, but you buy 20% more. In the latter case, your expected returns are 20% higher for the same level of risk. (That's an example of rewarded risk). So you always need to adjust returns for the risk taken. Once you do, a single stock loses compared to a broad market portfolio. This of course assumes that you aren't able to pick stocks that will have higher returns than the market based on the current prices, or to put it another way -- stocks that are underpriced. Considering who is setting the prices (Wall Street professionals doing research all day), this assumption seems justified.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby runner9 » Wed Jun 26, 2013 2:42 pm

YttriumNitrate wrote:
runner9 wrote:Answer: they're not healthy, etc. I have some bad eating habits but haven't had McDonalds or Coke products in over a decade. (ice cream's a whole different topic!)


You sure about that? Coke products now include: Fanta, Dasani, Minute Maid, Simply Orange, VitaminWater, Fuze, Honest Tea, Odwalla, and PowerAde.


No, not sure! add another +1 for indexes:) (I don't know about any of those, I'm boring--only tap water, no joke)
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Atilla » Wed Jun 26, 2013 2:54 pm

I'll be a contrarian. Hey, if it gets you jazzed about investing and learning - go ahead and buy some stock in those companies. You could certainly do worse things and you'll feel involved as you start investing for your future.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby mhc » Wed Jun 26, 2013 3:09 pm

OP,

read a few of the books recommended on the Wiki before investing. They will give you a better perspective of why your proposal is not a good idea.

Simplegift and ogd had a couple good reasons why your proposal is flawed.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby nisiprius » Wed Jun 26, 2013 3:10 pm

The myth of "great companies," companies that are so obviously great that there can't possibly be any risk in their stocks, is always with us. To begin with, it is obviously in every company's interest to foster that impression, both about the company itself and about its stock. That's why they stretch "generally accepted accounting principles" to the limit in order to create the illusion of perfectly regular earnings growth.

The truth is what F. W. Schwinn said to a young CEO, and it is true no matter what the size of the business is: "A young man in business is in danger of thinking that some day, when he has really mastered his job, everything will go smoothly. It is never going to happen. You had better know now that business means trouble. The two words are inseparable. From now on, you won't be out of trouble until you're out of business."

Giant corporations can flame out with breathtaking rapidity. Even if they do not vanish, like once-household-names TWA, or American Motors, or Wang, or Lehman Brothers, they can undergo stunning reversals of fortune. I don't know what portion of this posts readers remember the status IBM had. In the 1980s, under a perfectly friendly not-a-sales situation, my employer's IT group decided to have a lunch meeting with another employer's--both were not-for-profits and had just recently connected their Ethernet networks together, and we thought it might be fun to get to know each other. The other was a complete IBM shop. We had just decided on the Macintosh. I had asked whether they had taken a look at the Mac, and urged them to do so. They said, quote, "I'm not going to bother. If IBM doesn't have it, I doubt that it's anything important--and if it is, they will get it soon enough." Now perhaps they were right, but the point is that their attitude was common and almost justifiable. IBM was that powerful. It was perfectly possible to base a computer career on the assumption that there was no need to know anything about the products of any other company.And IBM stock had a cult-like status at the time, too.

Another point is, of course, the efficient market. Do you think other investors don't know that McDonalds and Coke are doing well? Why wouldn't the market price reflect that?

(By the way, in this forum the "cult" stock is probably Berkshire Hathaway... I will say no more).
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby prudent » Wed Jun 26, 2013 3:27 pm

nisiprius wrote:I don't know what portion of this posts readers remember the status IBM had.


Early in my career, I had a boss who loved to say "Nobody ever got fired for buying IBM". He was referring to their products, not the stock. In that era IBM was masterful at marketing. If the sales people were dealing with a middle manager who gave the impression the order might to to another company, IBM would have a higher level exec call that manager's boss and set up a meeting. In many cases, that manager's boss would be swayed by the IBM big shot and the order was clinched. If not IBM would have an even higher level person meet with that boss's boss. Ad infinitum, as needed.

It took a very brave person to buy from another company because by the time the deal was sealed, everyone higher up in the food chain had been briefed by IBM execs of the potentially reckless actions of their underling. And if there was one glitch, one delay in the project (which would happen no matter whose computers would be involved), well, everyone above him/her in the organization would assume that person was incompetent. After all, everybody had already been warned (by IBM, of course) that it would be a risky move.

Hence, "Nobody ever got fired for buying IBM."
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby The Wizard » Wed Jun 26, 2013 3:28 pm

I don't see any problem using 5% of your portfolio for investing amusement.
That's $50K out of $1 Million.
Buy around $10K each of KO and MCD then relax and watch the dividends roll in...
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby nisiprius » Wed Jun 26, 2013 3:30 pm

P.S. Here's an exercise that's worth trying, provided you actually try to dig out for yourself the names of some stocks that "everyone" thought were great ten years ago. NOT the stocks that everyone thinks are great today--the reason everyone thinks they're great is that they have done well recently.

Then, following the directions in http://www.bogleheads.org/wiki/How_to_u ... wth_charts, start by plotting the Vanguard 500 Index Fund (because that will get us back to about 1976 and also force Morningstar to plot the S&P 500). Now, in the "compare to" box, start typing the ticker symbols of the individual "great" stocks. That will plot growth charts for the stocks--total return, including dividends--along with the 500 Index. I think you'll see quickly how much dispersion there is, and how much luck is involved in picking stocks if you only pick a few.

For example, in 1999, Glassman and Hassett published a book entitled Dow 36,000, in which they proved mathematically (or thought they did) that the Dow had to reach 36,000 by 2005 at the latest. They also had some chapters of investing advice, including some stock picks, based on the valuation methodology of Elliot L. Schlang, whom they thought highly of and called "genius of Cleveland." They identified "three [stocks] that illustrate the Dow 36,000 Theory in practice." They were Tootsie Roll, General Electric, and Microsoft. (By the way, General Electric is a good example of a company that was thought to be an absolutely safe sure thing, with no need for further diversification because it ran so many different businesses, and every single GE business was among the top three in its category).

I don't know about Tootsie Roll, but in 1999 I think anyone who believed in "great companies with great stocks" would have said that GE and Microsoft were absolutely safe bets.

Here is how investments in these three individual stocks would have fared, compared to the index fund:

Image

The index fund actually beat all three of their picks. One might charitably call Tootsie Roll a tie, but by investing in GE or Microsoft instead of the index fund, you did yourself meaningful damage. That's not always the way it works--sometimes individual stocks significantly outperform the index.

The point is that picking stocks is not a slam dunk even if everybody says the companies involved are great companies.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Toons » Wed Jun 26, 2013 3:45 pm

SpaceSashimi wrote:As a young investor it just occurred to me that if I plan on holding my stocks for some time why shouldn't I invest my money in some stocks like Coca - Cola or McDonalds? Is this a no brainer? IS there any foreseeable downside to investing in these massive companies that are main stays in our world at this point?



Space ,25 years ago,before I knew about indexing,low costs etc,,I purchased both Coke and Mcdonalds and have reinvested the dividends along the way.Both investments have rewarded me over the long term with Mcdonalds outperforming Coke with average annual compounded return of over 10% a year,bumps along the way but I don't plan on selling.Why did I buy these 2 companies?I just figured cheesburgers and Cokes tasted so good,people would never quit eating them :happy .If I had to do it over again I would do the same,just be prepared for periods of depressed stock prices,(great for reinvesting as the dividend increases usually.Just received another nice dividend from Mcdonalds this month.
These two stocks are a portion of my portfolio,the majority of my assets are in mutual funds :happy
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby leonard » Wed Jun 26, 2013 3:47 pm

As a young investor - you have 30, 40, 50 years of investing in front of you. Coke, McDonald's, or any other company can go sideways in that time period. Trying to pick winners and losers over this time period is a fools errand.

So, buy Coke and McDonald's, just do it in proportion to market cap as part of your index funds.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby SpaceCommander » Thu Jun 27, 2013 10:17 am

Toons wrote:
SpaceSashimi wrote:As a young investor it just occurred to me that if I plan on holding my stocks for some time why shouldn't I invest my money in some stocks like Coca - Cola or McDonalds? Is this a no brainer? IS there any foreseeable downside to investing in these massive companies that are main stays in our world at this point?



Space ,25 years ago,before I knew about indexing,low costs etc,,I purchased both Coke and Mcdonalds and have reinvested the dividends along the way.Both investments have rewarded me over the long term with Mcdonalds outperforming Coke with average annual compounded return of over 10% a year,bumps along the way but I don't plan on selling.Why did I buy these 2 companies?I just figured cheesburgers and Cokes tasted so good,people would never quit eating them :happy .If I had to do it over again I would do the same,just be prepared for periods of depressed stock prices,(great for reinvesting as the dividend increases usually.Just received another nice dividend from Mcdonalds this month.
These two stocks are a portion of my portfolio,the majority of my assets are in mutual funds :happy


Of course this isn't very bogleheadish, but if you are going to buy individual large cap stocks, I would recommend diversifying beyond merely two. Start with 10, and 20 would be even better. Also keep in mind sector diversification. Ensure you're purchasing value (don't overpay). Reinvest the dividends and keep an eye on valuations, earnings, etc. Long before these companies go bankrupt, the numbers will tell their story: declining earnings, cut or eliminated dividends, etc. (Unless you have an Enron on your hands where they simply are cooking the books). Sure, you're taking far more risk with far more hassle than an index fund, but outsized returns are possible (even if not likely). FWIW
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Dulocracy » Thu Jun 27, 2013 11:30 am

If you buy individual shares, do not buy in blocks of fewer than 100. I have a friend that owns one share of apple. Commissions take a lot more when you have small numbers in the way of actual shares owned.

Having done this in the past, I do not recommend it. I did well... by luck. In the long run, you will do better to have mutual funds than individual stocks.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Kosmo » Thu Jun 27, 2013 11:56 am

I thought he was talking about what's for lunch. And I was going to say it's because McDonald's doesn't sell Pepsi...
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Petrocelli » Fri Jun 28, 2013 8:49 pm

The difference between Coke and McDonald's, on the one hand, and stocks like Apple, Enron and others mentioned above, is that Coke and McDonald's have a beta less than 1. Thus, if you assemble a portfolio of stocks like those, you will get a portfolio that pays nice dividends, and don't have huge price swings.

More importantly, you will get a portfolio that behaves differently than the Wilshire 5000, the EAFA Index or any small cap fund. It is not a substitute for a mutual fund portfolio, it is a diversifier that complements those funds.

Here's an example of such a portfolio.

http://socialize.morningstar.com/NewSocialize/PortfolioSharing/SharedPortfolioSnapshot.aspx?q=8C3C8006031DE36C
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby bottlecap » Fri Jun 28, 2013 8:53 pm

Why shouldn't everyone buy McDonald's and Coke? Why hasn't everyone already bought them all up?
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby investor » Fri Jun 28, 2013 9:03 pm

just buy BRK.b Berkshire Hathaway

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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Petrocelli » Fri Jun 28, 2013 9:03 pm

bottlecap wrote:Why shouldn't everyone buy McDonald's and Coke? Why hasn't everyone already bought them all up?


Are you asking this of me?
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby Petrocelli » Fri Jun 28, 2013 9:04 pm

investor wrote:just buy BRK.b Berkshire Hathaway

investor


I wouldn't buy just one stock. Twenty feels about right.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby investor » Fri Jun 28, 2013 9:07 pm

BRK already has your twenty.... not the same stocks but similar in kind. :>-)

Lakers was asking about you....

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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby nedsaid » Fri Jun 28, 2013 9:32 pm

There is nothing wrong with owning a portfolio of individual stocks. This is how I started out. To properly manage a stock portfolio takes some work at it is pretty doubtful you will outperform the market.

I am mostly in mutual funds, Index Funds, and Index ETF's but I still have a bit less than 15% of my retirement portfolio in individual stocks. I don't trade these much, pretty much I collect the dividends. The stocks pretty much behave as one would expect, in the two terrible bear markets they dropped by about half which is what the broad market did. When the markets recovered, they did too.

Buying some good stocks and reinvesting the dividends is a good strategy. It is important to buy them at a good price and to hold them long enough for whatever story to play out. With bond yields so low, I was glad that I owned my dividend stocks. I sure would not chase dividends here. Plan to hold your stocks for long periods of time.

A word of caution. Sooner or later you will have a stock blow up on you. This happened to me with Lucent and with AIG. I had success stories too and things more than balanced out.

Stockpicking is a lot of fun. Owning individual stocks can be a blast. It is doubtful you will outperform the market.

It is best for people to buy and hold the broad stock and bond indexes and make them the core of their portfolio.
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Re: Why Shouldn't I Buy McDonalds Or Coke?

Postby bottlecap » Fri Jun 28, 2013 9:37 pm

Petrocelli wrote:
bottlecap wrote:Why shouldn't everyone buy McDonald's and Coke? Why hasn't everyone already bought them all up?


Are you asking this of me?


No, just in general. Not everything is about you, Petro. :wink:

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