Joined: 25 Jun 2013
GMAT 1: 710 Q49 V35
, given: 2
GMAT tomorrow (08/26/13). feedback on essay is appreciated [#permalink]
25 Aug 2013, 04:01
The following appeared as part of the business plan of an investment and financial consulting firm.
“Studies suggest that an average coffee drinker’s consumption of coffee increases with age, from age 10 through age 60. Even after age 60, coffee consumption remains high. The average cola drinker’s consumption of cola, however, declines with increasing age. Both of these trends have remained stable for the past 40 years. Given that the number of older adults will significantly increase as the population ages over the next 20 years, it follows that the demand for coffee will increase and the demand for cola will decrease during this period. We should, therefore, consider transferring our investments from Cola Loca to Early Bird Coffee.”
The firm is thinking of shifting investments from Cola Loca to Early Bird Coffee because they see a general trend of shifting preference from cola to coffee as people age and the average age of population is going to increase in next 20 years. The assumptions and the consequent deductive logic is far fetched here and the firm is mistakenly oversimplifying a complex problem.
Investment analysis is a multi-faceted and multivariate exercise. The argument used to justify the soundness of the investment advice is deeply flawed. First, to analyze companies one has to appraise multiple factors such as business model, market position, financial health, and brand loyalty. Further in-depth analysis of the two companies is needed and the new information would be much more helpful to make any decisions. The argument above just states a fact which, if true, would impact the broad industry but not necessarily the companies in particular. Second, if the study and the concluded results are assumed to be accurate and true, then would not investing in pure commodity market of coffee be a better option than choosing a specific company in the sector. Making a conclusion that is a second derivative of the fact would induce much more error. Finally, the study itself is too simplistic and broad to form any opinion. Information regarding the size of study sample and the rate of change of drinking habits with age are not specified. If this is not considerable, the fluctuation might just be a random event or a statistical error rather than a time reinforced trend. Also the trend might also reflect a particular generation’s choice and not a standard shift in habit depending on age. A more detailed study for multiple age groups and with reason for the change in preference would give a clearer picture.
The argument could have been strengthened had the author taken into account, the deficiencies enumerated above. One needs more relevant and adequate information to reach a holistic conclusion.