Whole Foods Quackery

Source:  The Quackometer

Source: The Quackometer

Fortune has a puff piece out on Whole Foods Market (WFM, a stock in which I have no interest and no intended interest), the up-scale purveyor of excellent prepared food, overpriced groceries with multiple claimed but unsubstantiated benefits, phony health remedies, and the oxymoronic concept of “healthy indulgence.” It made its reputation by pushing healthier living and selling food that doesn’t contain the pesticides and additives that are often staples of “regular” food.

The Whole Foods approach has worked in that its share price is up about 12-fold since its November 2008 recession-era low versus 130 percent for the S&P 500 index. “Great brands impose a view on you,” WFM consultant Kevin Kelley says, and Whole Foods is no exception. “One of the faults that traditional groceries have is they believe the customer is always right.” Today, Whole Foods has a list of 78 banned ingredients, ranging from aspartame to foie gras to high-fructose corn syrup. You may want a Coke, but you can’t get one at Whole Foods.

However, when I took a look at the ingredients that provided Whole Foods its success, the whole thing became far less appetizing. The Whole Foods emphasis on “natural” foods is obviously silly. There is no such thing as non-natural food. Moreover, at least in the United States, it has no consistent meaning. Indeed, the federal Food and Drug Administration explicitly discourages the food industry from using the term. But that doesn’t stop Whole Foods. After all, it’s working.

Oh that a bit of silliness were the only problem. Despite broad scientific consensus that genetically modified food poses no greater health risks than other types of food, Whole Foods says it will require all its vendors to label products with GMOs by 2018 and suggests (at least by inference) that such food isn’t really good for you. Whole Foods would also have you believe that organic produce (which is, not so coincidentally, much more expensive than “regular” produce) will help you stay healthier, even though a major study published in the Annals of Internal Medicine (nicely summarized here) examining hundreds of scientific studies over many years found no evidence of health benefits from organic foods. “There’s a definite lack of evidence,” emphasizes Crystal Smith-Spangler of the Stanford University School of Medicine and an author of the study.

But these issues aren’t all that much to be really upset about. If people want to overpay for something they think will make them healthier, the fact that it doesn’t isn’t too big of a deal. Nobody’s getting hurt and people are stupid all the time. However, the Whole Foods story gets still worse – much worse.

As reported by Michael Schulson in The Daily Beast, Whole Foods pitches homeopathic remedies (such as homeopathic remedies for allergies, homeopathic remedies for colds and fluBoiron homeopathic medicines and even cures for cancer) as well as other foods and “drugs” that make medical claims that are simply false. Homeopathy is, after all, pure quackery. Whole Foods also sells probiotics — live bacteria given to (allegedly) treat and prevent disease – but it’s a total scam: “If you are a normal human, with a normal diet, save your money. Probiotics have nothing to offer but an increased cost.”

Phony claims such as these are far more damaging than simply pushing “natural” and organic foods. That’s because such fake remedies often cause people to forego substantive medical care that might actually help. For example, such an approach may well have cost Steve Jobs his life, to his obvious regret.

Sadly, it isn’t just customers who have fallen for the Whole Foods hype. “They’re a leading national authority on health and nutrition,” says BB&T Capital Markets analyst Andrew Wolf, “and unequivocally the leading retailer on the link between food and health.” As if.

My friend Josh Brown even fell for the WFM nonsense: “There’s a lesson in the Whole Foods brand that I think carries a great example for my organization and possibly yours as well: The customers are not always right and, more importantly, they sometimes wants [sic] to be told what’s best for them and to have harmful options taken away from within their grasp.” Unfortunately, what customers are told is all too frequently in error and obviously bad for them, as Whole Foods so aptly demonstrates.

Happily, I have every confidence that Josh is doing right by his clients. And I completely agree with Josh’s conclusion: “Zealous advocacy is not fascism, and steering a customer away from something they don’t need or shouldn’t want is just as important as the actual suggestions you are making.” But Whole Foods is far from a good example of “doing [what] is superior and in the clients’ best interest.” In fact, Whole Foods should be a cautionary tale rather than an exemplar.

Maybe there really is a sucker born every minute and Whole Foods will continue to survive and even thrive despite its bogus marketing. But I’d like to think that truth will out, at least eventually.

The USA — Once an Emerging Market

Scott Krisiloff of Avondale Asset Management has a fine new piece up making the case that we might want to consider lowering our domestic equity return expectations in part on account of ongoing lower dividend yields. That concept is consistent with the long-term trend line for domestic equities. For example, the average return for the S&P 500 index was 11.50 percent for the period 1928-2013. For 1964-2013 (the last 50 years), the S&P’s average return dipped to 11.29 percent and from 2004-2013 (the last ten years), the average dropped to 9.10 percent.

It’s surely possible that these declines are more a function of the (arbitrary) dates chosen and/or the vagaries of business and economic cycles rather than a signal of some significant structural change. But it’s also possible that such declines are to be expected given the remarkable changes in the U.S. economy over those decades. It can be easy to forget that the USA hasn’t always been the world’s economic leader, and needn’t remain so (see below).

GDP-History

In the same way that we expect higher returns from investments in emerging and developing economies as compared to those in developed economies on account of higher risks, we might expect aggregate returns in domestic equities to have declined as the American economy has matured. After all, it wasn’t all that long ago that the USA was among the “emerging-est” of emerging markets countries.

A Short Introduction to Investing (in 400 words)

  1. introduction“Investing successfully is really hard.” (Tadas Viskanta).
  2. “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” (Mark Twain).
  3. Manage risk first.
  4. In the shorter-term, markets are voting machines; in the longer-term, they are weighing machines.
  5. “Markets can remain irrational longer than you can remain solvent.” (John Maynard Keynes).
  6. We like to think we see things as they really are, but we actually see things as we really are.
  7. Information is cheap; meaning is expensive.
  8. There is always someone on the other side of a trade and that someone is often smarter and more well-informed than you are.
  9. Investing is both probabilistic and mean-reverting.
  10. Cut your losses; let your winners run.
  11. “Investment success accrues not so much to the brilliant as to the disciplined.” (William J. Bernstein).
  12. When you’ve won, stop playing.
  13. Diversification is the only free lunch in the markets.
  14. Data is more reliable than your gut.
  15. “The big money is not in the buying or the selling, but in the sitting.” (Jesse Livermore).
  16. Various market approaches work…until they don’t.
  17. Value process over outcome.
  18. “We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation.” (Jack Bogle).
  19. It probably isn’t different this time.
  20. Fight the current war, not the last one.
  21. Make sure your facts are right and your data is good.
  22. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” (Franklin Templeton).
  23. Being exceptional requires doing things differently.
  24. You can be and often are wrong.
  25. Plan (and have contingency plans).
  26. “For the simplicity on this side of complexity, I wouldn’t give you a fig. But for simplicity on the other side of complexity, for that I would give you anything I have.” (Oliver Wendell Holmes, Sr.).
  27. Correlation is not causation; consensus is not truth; and what is conventional is rarely wisdom.
  28. We always know less than we think.
  29. “Never confuse genius with a bull market.” (Humphrey B. Neill).
  30. History doesn’t repeat, but it often rhymes.

Five Stinkin’ Feet

Investment Belief #5: Process Should Be Prioritized Over Outcomes InvestmentBeliefssm2 (2)

My first baseball memory is from October 16, 1962, the day after my sixth birthday, by which time I was already hooked on what was then the National Pastime. In those days, all World Series games were played during the day. So I hurried home from school on that Tuesday afternoon to turn on the (black-and-white) television and catch what I could of the seventh and deciding game of a great Series at the then-new Candlestick Park in San Francisco between the Giants and the New York Yankees.

Game seven matched New York’s 23-game winner, Ralph Terry (who in 1960 had given up perhaps the most famous home run in World Series history to lose the climatic seventh game), against San Francisco’s 24-game-winner, Jack Sanford. Sanford had pitched a three-hit shutout against Terry in game two, winning 2-0, while Terry had returned the favor in game five, defeating Sanford in a 5-3, complete game win. Game seven was brilliantly pitched on both sides. While Terry carried a perfect game into the sixth inning (broken up by Sanford) and a two-hit shutout into the ninth, Sanford was almost as good. The Yankees pushed their only run across in the fifth on singles by Bill “Moose” Skowron and Clete Boyer, a walk to Terry and a double-play grounder by Tony Kubek.

1962 WS ProgramsWhen Terry took the mound for the bottom of the ninth, clutching to that 1-0 lead (the idea of a “closer” had not been concocted yet), he faced pinch-hitter Matty Alou, who drag-bunted his way aboard. His brother Felipe Alou and Chuck Hiller struck out, bringing the great future Hall-of-Famer Willie Mays to the plate, who had led the National League in batting, runs and homers that year, as the Giants’ sought desperately to stay alive. Mays doubled to right, but Roger Maris (who had famously hit 61 homers the year before and who was a better fielder than is commonly assumed) cut the ball off at the line. His quick throw to Bobby Richardson and Richardson’s relay home forced Alou to hold at third base.

With first base open, Giants cleanup hitter and future Hall-of-Famer Willie McCovey stepped into the batter’s box while another future Hall-of-Famer, Orlando Cepeda, waited on deck. Yankees Manager Ralph Houk decided to let the right-handed Terry pitch to the left-handed-hitting McCovey, who had tripled in his previous at-bat and homered off Terry in game two, even though Cepeda was a right-handed hitter. With the count at one-and-one, McCovey got an inside fastball and rifled a blistering shot toward right field but low and just a step to Richardson’s left. The second baseman, who Terry had thought was out of position, snagged it and the Series was over. McCovey would later say that it was among the hardest balls he ever hit.

“It was an instant thing, a bam-bam type of play,” recalled Tom Haller, who caught the game for the Giants. “A bunch of us jumped up like, ‘There it is,’ then sat down because it was over.

“It was one of those split-second things. ‘Yeah! No!’ “

Hall-of-Famer Yogi Berra, who has pretty much seen it all, said, “When McCovey hit the ball, it lifted me right out of my shoes. I never saw a last game of a World Series more exciting.”

Had McCovey’s frozen rope been hit just a bit higher or just a bit to either side, the Giants would have been crowned champions. As recounted by Henry Schulman in the San Francisco Chronicle, it was a matter of “[f]ive stinkin’ feet.”

Tremendous skill was exhibited by the players on that October afternoon over half a century ago. But the game – and ultimately the World Series championship – was decided by a bit of luck: that “five stinkin’ feet.” Continue reading

Yale Model Heat Check

Yale KeyWith a new report out from the Yale Endowment, now is a good time to do a heat check on how the so-called “Yale Model” of investing is doing. I have written about the Yale Model numerous times (see here, here, here and here, for example). It emphasizes broad and deep diversification and seeks to exploit the risk premiums offered by equity-oriented and illiquid investments to investors with an investment horizon that’s sufficiently long – in Yale’s case, essentially forever. It has worked exceptionally well for Yale. For others…not so much. Continue reading

We Are Less Than Rational

Investment Belief #3: We aren’t nearly as rational as we assume

InvestmentBeliefssm2 (2)Traditional economic theory insists that we humans are rational actors making rational decisions amidst uncertainty in order to maximize our marginal utility. Sometimes we even try to believe it.  But we aren’t nearly as rational as we tend to assume. We frequently delude ourselves and are readily manipulated – a fact that the advertising industry is eager to exploit.1

Watch Mad Men‘s Don Draper (Jon Hamm) use the emotional power of words to sell a couple of Kodak executives on himself and his firm while turning what they perceive to be a technological achievement (the “wheel”) into something much richer and more compelling – the “carousel.”

Those Kodak guys will hire Draper, of course, but their decision-making will hardly be rational. Homo economicus is thus a myth. But, of course, we already knew that. Even young and inexperienced investors can recognize that after just a brief exposure to the real world markets. The “rational man” is as non-existent as the Loch Ness Monster, Bigfoot and (perhaps) moderate Republicans.  Yet the idea that we’re essentially rational creatures is a very seductive myth, especially as and when we relate the concept to ourselves (few lose money preying on another’s ego). We love to think that we’re rational actors carefully examining and weighing the available evidence in order to reach the best possible conclusions.

Oh that it were so. If we aren’t really careful, we will remain deluded that we see things as they really are. The truth is that we see things the way we really are. I frequently note that investing successfully is very difficult. And so it is. But the reasons why that is so go well beyond the technical aspects of investing. Sometimes it is retaining honesty, lucidity and simplicity – seeing what is really there – that is what’s so hard. Continue reading

Get Real

Investment Belief #2: Smart Investing is Reality-Based

InvestmentBeliefssm2 (2)Anytime is a good time to talk baseball. I’ve done it pretty much my whole life. If you’re watching a game, its pace is perfectly conducive to discussing (arguing about) players, managers, strategy, tactics, the standings, the pennant races, the quality of ballpark peanuts, and pretty much anything else. In the off-season, the “hot stove league” allows for myriad possible conversations (arguments) about how to make one’s favorite team better. And now that spring training camps have opened, baseball talk about the upcoming season and its prospects has officially begun again in earnest.  The coming of Spring means the return of hope — maybe this will finally be the year (Go Padres!) — which of course means talking (arguing) about it.

Our neighborhood quarrels about the National Pastime when I was a kid were incessant and invigorating, and didn’t have to include the vagaries of team revenues and revenue-sharing, player contracts, free agency and the luxury tax, as they do now. We could focus on more important stuff. Who should be the new catcher? Who should we trade for? Do we have any hot phenoms? Who’s the best player? The best pitcher? The best hitter? The best third baseman? Who belongs in the Hall of Fame? Which team will win at all this year? How do the new baseball cards look? Is the new Strat-O-Matic edition out yet?

Early on, my arguments were rudimentary and, truth be told, plenty stupid. They were ideological (the players on my team were always better than those on your team), authority-laden (“The guy in the paper says…”), narrative-driven (“Remember that time…”), overly influenced by the recent (“Did you see what Jim Northrup did last night?”) and loaded with confirmation bias.

Quickly I came to realize that it’s really hard to change an entrenched opinion, and not just because I was arguing with dopes. Slowly it became clear that if I wanted to have at least a chance of winning my arguments, I needed to argue for a position that was reality-based. I needed to bring facts, data and just-plain solid evidence to the table if I wanted to make a reasonable claim to being right, much less of convincing anyone. Arguments and beliefs that are not reality-based are bound to fail, and to fail sooner rather than later.

Continue reading

Russell’s Revenge

In the investing world as elsewhere, we face the all-too-human tendency to jump to immediate conclusions, to accept conventional wisdom too eagerly and to fall prey to hyperbolic discounting – valuing now too highly and not yet not enough. But as I often say, hope is not a strategy and lunch is not a long-range plan. This problem was illustrated in a fantastically funny way recently by Super Bowl winning quarterback Russell Wilson of the Seattle Seahawks on Twitter.Russell's Revenge

Continue reading

Worth Reading

Worth ReadingI never miss Jeremy Grantham’s quarterly GMO letter, the newest version of which is just out. You shouldn’t miss it either. This time he looks at a variety of issues including energy, commodities, U.S. GDP, an early (then legal) foray into insider trading and eight investment lessons he has learned. All the lessons are valuable, but I was particularly struck by #6, perhaps because it’s a point I make often: painful errors teach you more than success does. Here’s the list, but don’t miss the entire letter.

  1. Inside advice, legal in those days, from friends in the company is a particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm;
  2. Always diversify, particularly for your pension fund;
  3. Fraud, near-fraud, or colossal incompetence can always strike;
  4. Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index;
  5. Investing when young will start your brain turning on things financial;
  6. Painful errors teach you more than success does;
  7. Luck helps; and finally,
  8. Have a convenient mother to be the fall guy.

Exhibit A

Investing and politicsI have often warned against making investment decisions based upon political commitments, and I am hardly alone. A wonderful/dreadful example is provided by Stephen Moore, who announced this week that he is leaving The Wall Street Journal to become Chief Economist for the Heritage Foundation. Quite obviously, Moore opposes the policies of President Obama vociferously (“Everything he’s done has been such a massive failure…”).

That is his right, of course, and I take pains to keep Above the Market away from politics as much as possible. My point is that Moore’s political commitments foolishly override more objective analysis and thus impact his economic and investment outlooks negatively. Continue reading