ARG-050

The following appeared in a newsletter offering advice to investors.

"Over 80 percent of the respondents to a recent survey indicated a desire to reduce their intake of foods containing fats and cholesterol, and today low-fat products abound in many food stores. Since many of the food products currently marketed by Old Dairy Industries are high in fat and cholesterol, the company's sales are likely to diminish greatly and company profits will no doubt decrease. We therefore advise Old Dairy stockholders to sell their shares, and other investors not to purchase stock in this company."


Write a response in which you discuss what questions would need to be answered in order to decide whether the advice and the argument on which it is based are reasonable. Be sure to explain how the answers to these questions would help to evaluate the advice.


In this newsletter, the author advises Old Dairy stockholders to sell their shares and other investors not to purchase stock in this company. To strengthen his/her recommendation, the author cites a recent survey, which indicated more than 80 percent of the respondents’ desire to abstain from foods containing fats and cholesterol. In addition, the abundance of current low-fat products in many food stores, as well as the great number of Old Dairy’s high-fat and high-cholesterol products, are also given to support the predicted diminished sales and decreased profits of the company. However, before we reach a final decision about whether or not this advice is reasonable, we first need to raise several questions, and the answers to these questions would help us assess this proposal.

First of all, despite the survey indicating most respondents’ desire to refrain from foods containing fats and cholesterol, we need to know whether this desire would directly lead to a decrease in the products of Old Dairy Industries. Specifically, we need to ask: are the respondents swayed by other factors when selecting foods, such as flavor or price? Also, are the respondents able to distinguish the foods containing fats and cholesterol from those that do not? If flavor and price do influence the respondents’ purchase behavior more than nutritional elements do; or if the respondents cannot tell the difference between high-fact and high-cholesterol foods and other foods, a definite decline in high-fat and high-cholesterol foods of Old Dairy would not be guaranteed, and the author’s suggestion is undermined. Otherwise, the conclusion of the argument may be verified and the advice is reasonable.

Secondly, even though the author informs us that many food products currently marketed by Old Dairy Industries are high in fat and cholesterol, he/she would benefit from clarifying the question: what fraction do these products comprise of all foods produced by Old Dairy Industries? Or, more specifically, does Old Dairy Industries also produce low-fat and low-cholesterol foods? If the answer is yes, then even if the foods containing high fats and cholesterol might suffer from a decline in sales, this decline could probably be offset by an increase in sales of the company’s low-fat and low-cholesterol products. As a result, the company’s overall sales would not witness a decrease and neither would their profits. However, if Old Dairy Industries relies heavily on sales of high-fat and high-cholesterol food, then the company is subject to a significant decrease in both sales and profits.

Finally, granted that low-fat and low-cholesterol foods may come to dominate the food market and Old Dairy Industries mainly produces foods with high fats and high cholesterol, before deciding whether Old Dairy Industries is worth investing in, we need to know the company’s intent. That is to say, we need to ask: will the company change its strategy and main products in the future? If Old Dairy is flexible in its strategy and can therefore efficiently exchange its products in order to appeal to those favoring low-fat and low-cholesterol foods, we may advise stockholders against selling shares and persuade others to invest. If the opposite is true, then we may encourage Old Dairy stockholders to sell their shares, and at the same time deter other investors from purchasing stock in this company.

To sum up, although the financial market fluctuates greatly, we should not make hasty decisions in response to every erratic market change. In order to decide whether the recommendation in the argument is reasonable, we need to ask the aforementioned questions and the answers to the questions would contribute to a better evaluation of the proposal.



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