I Kid You Not Crazy

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

We all played this game when we were kids. You say a number. Your friend tries to demonstrate his knowledge by saying a bigger number. At some point you proudly get to infinity – the largest number of all. Your friend doesn’t blink; he says, “Infinity times a hundred,” then he thinks for a second and spouts out, “Infinity times infinity!” How do you beat that?

When assets get overvalued and get into crazy territory, explaining their overvaluation feels like playing this “infinity times infinity” game. But at least, if we line up different crazy valuations next to each other, it is going to be easier to distinguish levels of craziness.

Let’s start with the least crazy of all the crazies – bond-substitute type stocks.

In this example I’ll focus on Coca Cola, but I could have written this about almost any consumer goods company – the likes of Kimberly Clark, McCormick, WD-40, and many others that pay a stable dividend.

Coca Cola has been spreading joy (and diabetes) globally since 1886. It is truly an incredible business: The company makes a concentrate and ships it to bottlers, who put in the hard capital, bottle that syrup, and distribute it to every corner of the world. Coke, in concert with its bottlers, has the best distribution system in the world.