FOOL PLATE SPECIAL
An Investment Opinion

Finance 101: Emory's Coca-Cola Debate

By Brian Graney (TMF Panic)
January 28, 2000

Continuing where compatriot Bill Barker left off in last night's Fool on the Hill about the strange stock market phenomena that is Barron's lead columnist Alan Abelson, I thought I would devote today's column to another random act of weirdness that appeared recently in a different Dow Jones & Co. publication.

But before we pick up any Foolish shovels and start digging, a few words about the purpose of calling well-known -- some would even say rival -- financial publications on the carpet from time to time is probably in order. Frankly, our central aim is not to be character assassins, but rather chroniclers of misguided thinking. In other words, it's nothing personal. We're just Fools, after all.

Today's investing untruth sacrifice is being offered up by an article entitled "Emory University Gets Hard Lesson As Coke's Stock Fails to Make Grade," which ran in this morning's Wall Street Journal. Because the Journal's circulation is about six times the circulation of Barron's, we're shifting into speedy response mode. Typically, we shy away from making snap judgments. But every now and then, the Journal serves up a gopher ball of a misperception that we just can't help but hit out of the park. Today is one of those days.

The Journal's website is pay-per-view, so here's the Cliffs Notes on the article in question: Emory is dumb for keeping more than half of its $4.5 billion endowment in Coke stock, given that Coke's share price has lost 30% over the past 18 months or so. The school's endowment has been Coke-heavy for at least 20 years, according to the article. The endowment has grown substantially over the years thanks to Coke and was a mere $1.5 billion just seven years ago, but that seems to be beside the point.

Of course, the article's author didn't really call the Atlanta institution dumb. He left that task to a pair of the university's actual professors. A finance professor called the decision not to dump some of the Coke shares for other investments "foolish," while an economics prof said the failure to diversify is "just stupid." Amazingly, the finance professor even works out of Emory's own Roberto C. Goizueta Business School, which bears the name of a great, late Coke CEO.

So, the gist of the article is diversification. One of the professors says, "...all of the evidence says you diversify." Meanwhile, the school's board echoes the view of Emory's chief operating officer, who says, "We're not uncomfortable holding what we're holding now." This is an interesting situation. The folks that are supposed to know the most about investing -- the professors with lots of academic credentials hanging on their office walls -- are being trumped by an administration with a long-term buy and hold approach. If there was ever a more clear-cut case of Wise vs. Fools, I have not heard of it.

The article leaves out a few major points. First, the company in question is not just your run of the mill enterprise. It is the Coca-Cola Co. (NYSE: KO), one of the most profitable and dominant product marketers the world has ever seen. You would think everyone in Coke's hometown of Atlanta would realize this, given that the soft drink has been a local fixture for over 100 years and the company's "World of Coca-Cola" pavilion is one of the city's top tourist attractions.

Second, it has been well-documented that the largest fortunes in America are not based on diversification. Rather, they have been built through concentrated investment, more often than not in a single enterprise. A quick look at the source of the wealth of the top 50 members of the Forbes 400 list of the richest people in America would reveal this fact. Most of the billionaires on that list made their money from one good idea, not through diversification. Sadly but not surprisingly, none of the top 50 made their money from teaching college-level finance or economics.

Finally and most importantly, the Journal story leaves out the most crucial detail of all. The folks chanting "Di-vers-i-fy! Di-vers-i-fy" at Emory like British soccer hooligans are not just sitting in their ivory towers all day long. They are the teachers, the ones who have been charged with instructing the university's student population about investing. There are certainly a number of good investing professors around, the University of Pennsylvania's Jeremy Siegel and Harvard's William Fruhan among them. But for every Siegel or Fruhan, there are dozens of university instructors still holding fast to Efficient Market Theory or some other such academic yick-yack. And that's sad.

I've never taken Finance 101 at Emory, so I'm in no position to critique what is being taught there. But I'm willing to bet that the first day of class does not start with a trip to the Dean's office to see how the school's Coke-flavored endowment has grown over time. Perhaps it should.