2013 World's Most Respected Companies

Barron's released their annual ranking of the world's most respected companies this past weekend.

World's Most Respected Companies

This is the ninth year of the ranking. Barron's polls professional money managers on their views of the 100 biggest companies in the world by market value.

Here's the top five:

Berkshire Hathaway (BRKa)
Walt Disney (DIS)
Apple (AAPL)
Google (GOOG)
Coca-Cola (KO)

Consider that Berkshire had fallen from 3rd to 15th on this same list in the last survey. The article points out that stock price performance, to an extent, explains the "rekindled fondness for Berkshire".

Well, consider what psychologists call the "halo effect" as described by Jason Zweig in this Wall Street Journal article:

In this quirk of the human mind, one powerful impression spills over onto our other judgments of a situation.

One example of this comes from changes to a company's stock price:

The Halo Effect: How it Polishes Apple's and Buffett's Image

...a soaring stock price can lead investors to regard the company's managers as focused, disciplined and passionate—while, in the negative halo of a falling stock price, the same executives will now seem stubborn, unimaginative and resistant to change. 

Investors think, at either time, that they are evaluating the stock and the managers independently, but one opinion inevitably colors the other, often leading investors to be too bullish on the upside and too bearish on the downside.

The effect naturally applies to not just Apple or Berkshire. It's one reason an investor will tend to pay more than necessary when the outlook for a company seems less uncertain and more favorable. I say "seems less uncertain", of course, because the world is always, in reality, quite uncertain. It might, at times, seem more certain but the possibility that unforeseen and unforeseeable events will eventually prove otherwise is always there.

That's neither a reason to invest or not. It's a description of the world as it is and always has been.

It's just that it's tough to get a great price relative to per share intrinsic business value when the headlines are rosy and a particular business seems to be doing well.

Even the best business goes through ups and down. If an investor generally never pays a premium for what, at the moment, seems to be excellent prospects, there's less chance of being hurt when the tide turns.

Berkshire's intrinsic value changed much less than its stock price action in recent years would seem to indicate.

In fact, most reasonably good businesses will experience rather minor changes to intrinsic business value compared to their stock price fluctuations.

How changes to the stock price of a business impact perceived value is just one example of  the "halo effect". The effect goes far beyond just stock price action. It applies wherever the perception of one quality influences one's judgment of another without merit.

I'm not sure what to make of any ranking like this since it represents a mere snapshot of perception but, as far as investment goes, my guess is the short-term fluctuations in "respect" should be viewed much like any fluctuation in the market prices.

"Mr. Market is there to serve you, not to guide you." - Warren Buffett in the 1987 Berkshire Hathaway (BRKa) Shareholder Letter

If some temporary disrespect makes something very cheap an investor should allow that to serve them.

That way of thinking, of course, applies at the other end of the spectrum as well.

Adam

Long position in BRKb, AAPL, GOOG, and KO established at much lower than recent market prices
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