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Rate my AWA? Exam next week :(

This topic has 0 member replies
ash6486 Newbie | Next Rank: 10 Posts
Joined
07 Aug 2016
Posted:
1 messages

Rate my AWA? Exam next week :(

Post Sun Aug 07, 2016 6:30 pm
A big thank you in advance!

“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.”'

442 words:

The author suggests transferring investments in Cola Loca to Early Bird Coffee to generate higher returns over the coming years due to an observation that coffee drinkers drink increasing amounts of coffee as they age whereas cola drinker’s consumption of cola decreases. The evidence presented to support his argument is vague at best and misleading at worst, and would mandate a full reconception before his company executes this plan.

Firstly, the author's most erroneous assumption is that the population of older people is going to be the majority in the coming years. He has not made reference to what the population breakdown by age is at present. To further cement this conclusion, he also needs to provide some evidence of slowing birth rates. Although it can be argued that most developed countries face increasing proportions of aged people to total population, there are plenty of developing countries where aged people are decreasing in terms of total population owing to higher birth rates, for example. The author absolutely needs to be aware and provide information on this to reach his conclusion. Furthermore, the author has given no clarity as to what his unit of measurement is. To be comparable, consumption of coffee and cola need to be measure across the same scale. Is it cups a day? Is it volume based? Simply 'consumption' does not give much clarity when comparing. The author's investment decision is also misguided. One cannot simply expect higher returns from an investment given a particular industry-wide trend. There are other important factors in play when deciding to invest in a company. How is it doing relative to peers? What's the management's track record? How is its growth and profitability? All these factors collectively lend towards a company's performance and hence investment returns. Another grave error is that in making his investment recommendation, the author assumes that past trends will be an indicator of future performance. Despite this trend being stable for the past 40 years, there is no guarantee that a similar trend can be anticipated going forward. This is an extremely shaky basis that cannot provide a strong footing when deciding an investment decision. A countless number of factors can lend towards changes in purchasing patterns.

In summary, the author states that an investment in a coffee company would tend to generate better returns than an investment in a cola company owing to consumption trends of coffee and cola across time. To better support his argument, the author needs to give more clarity on demographics and trends, clarify his units of measurements, and also look into potential reasons why that pattern has remained for the past 40 years.

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