GMAT

Investment Diversification

GMAT Essay Topic 441 - 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." Discuss how well reasoned . . . Etc.

Author: abhishekhurkat | Date: August 11, 2014 | Score: 4.5 | => 5 or 6 Essays, Click Here <=

Investment Diversification

The argument states that the investment and financial consulting firm should transfer investments from Cola Loca to Early Bird Coffee. The reasoning behind this argument is based on a study which suggests that the consumption of coffee increases with age and remains high even after the age of 60 while the cola consumption declines after the age of 40 and as the number of older adults will significantly increase as the population ages over the next 20 years so they should switch their investments. The above argument is flawed because it alters the fact and presents a false conclusion on the base of the assumptions and thus cannot be accepted. There are several flaws in the argument.

The argument claims that the study that on an average consumption of coffee increases with age, from age 10 through age 60. Even after age 60, coffee consumption remains high. While the average consumption of cola declines with increasing age. This assumption is weak unless we know the sample size. It is possible that the survey was conducted for a office or a society while that consumption pattern may not be applicable for population. So unless we know that the sample size we cannot conclude that the same consumption pattern is applicable for the population.

Secondly the arguments states that the population will grow older in next 20 years and thus the consumption of coffee will be higher, but it might not be necessarily true. The eating habits vary from generation to generation. We cannot say the eating habit for the next generation will be the same as that of previous generation. For eg: 20 years ago in India no one used to eat fast food and thus one would have advised that one should not invest into this segment but currently it is one of the fastest growing segment in food and beverages category. So the consumption habit changes with age group, demography time and thus cannot be generalised.

Finally the author stated that they should switch their investment from Cola to coffee. Even if the survey findings are true it does not necessarily make sense to switch from cola to coffee. The cola companies sell might be much higher and more profitable than coffee company. So even after the consumption declines it might be generating better profits than coffee company due to higher operating margins and higher market share in beverage segment.

We may conclude that in order to strengthen the argument the athor should throw more light on aspects such as survey methodology, sales profile,sample size, demographic patterns, companies market shae, profitability etc. If he has includes these aspects than it can significantly strengthen the argument.


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