A cynic’s definition of a value investor: someone who seeks to buy at 40 cents a business that is worth a dollar and to invest in a business that is able to charge a dollar for what is worth 40 cents.
What does a value investor do when, walking around the aisles of a Tesco supermarket, he is faced with the choice of buying a 2-litre bottle of Coca Cola at £1.59 or, right next to it, a 2-litre bottle of Tesco Cola for £0.50?
I recently faced the same question when my friend Sherri and I were looking to buy the ingredients for a proper ‘full English’ breakfast for Sunday morning – sausages, bacon, eggs, mushrooms, hash browns and baked beans. When it came to the latter, we had to choose between buying a can of Heinz baked beans for £0.85 or an otherwise identical can of Tesco baked beans for £0.30.
As I value-investingly fetched the Tesco can and put it in the basket, Sherri looked at me with an air of amused disapproval: “Come on, I think we can afford a can of Heinz – it’s the weekend!” “What do you mean, it’s the same stuff, isn’t it?” – I replied, playing on and launching into a tale of my visits to La Doria – the Italian firm where the Tesco beans probably came from – which somehow failed to raise her interest. “I bet you can’t tell the difference”. “Of course I can – said Sherri – there is a reason why Heinz beans cost more: they are better quality and they taste better.” “Okay, we’ll see” – I said, as I put both cans in the basket and started to savour the opportunity to run my own version of the most famous experiment in the history of statistics.
Back home, I asked Sherri to bear with me and wait in the living room while I prepared the experiment in the kitchen. I opened both cans and distributed some of their content onto 8 small plates, 4 with Heinz beans and 4 with Tesco beans, and displayed them in two rows.
Then I took Sherri, blindfolded her to eliminate the chance that she would spot a visual difference – the beans looked the same to me but you never know – and asked her to sit in front of the plates.
“There are 4 pairs of plates in front of you. For each pair, one plate contains Heinz beans and the other has Tesco beans. Each plate has its own spoon to avoid contamination. I would like to ask you to taste some beans from each plate, and for each of the 4 pairs tell me which one is Heinz and which one is Tesco”. “Okay” – said Sherri, anticipating a quick dash to victory. She tasted the first pair, and after a few seconds, over which I could see her realise that the task was not as easy as she had thought, she indicated which was which. She was right. “Okay, onto the second pair” – I said, with the acquired taste of a proud scientist enjoying the chance of being proven wrong. After sipping some water to clear her palate, Sherri proceeded and, after a few more seconds of hesitation, made her choice. “Wrong” – I said, with as soft a tone as I could muster to avoid hurting her feelings. “Okay okay, that can happen” – she retorted. “Sure it can” – I said, as I placed the third pair in front of her, this time actually hoping to be proven wrong. Alas, she was wrong again. And so she was in the fourth and final choice.
“All right all right, mister, you’ve proven your point” – she said with a smile, taking the blind off her beautiful eyes. “Yep” – I said, myself surprised by the embarrassing abundance of confirmatory evidence in favour of my hypothesis of interest. 2-2 would have been a better result – still proving my point but leaving her with some sense of dignified achievement.
“Okay, all done? Off we go” – said Sherri, as I cleared the table and she started to prepare her succulent ‘full English’. I transferred the beans into two bowls, one for Heinz and one for Tesco, and added the rest of the cans to each. One can was enough for the breakfast. So I asked Sherri which bowl she wanted me to put in the microwave – the Heinz, which she had just chosen as the better tasting 1 out of 4 times, or the Tesco, which she had chosen 3 out of 4 times?
“Heinz please” – she answered with a wry smile, aware of the inconsistency of her choice but happy to go along with her habitual preferences. I obliged and sat down, in quiet contemplation of the sheer power of established franchises and the value of brand moats that make Kraft Heinz a $42 billion company.