Many years ago, while skiing in Chamonix I met a dreadlock haired, weed smoking snowboarder. He was somewhat paranoid and full of conspiracy theories, suspicious of anything that was too mainstream. He enjoyed music like this. He claimed that marijuana and psychedelics were not addictive. Governments knew this, but greatly feared these drugs were harmful anyway, because they encouraged people to question long accepted narratives. I wrote about the legalisation of psychedelics for MoneyWeek here.
Later, he began to sound really far out, claiming that sugar was more addictive than most class A drugs and caused more damage. The food industry knew this and secretly added it to processed food because it helped sell more. He went further, and saying that ‘big food’ corporations had funded studies to show that fat and cholesterol were really bad, but sugar was not damaging.
I smiled and nodded. I was pretty sceptical. But it’s odd that many of his assertions have been verified these days.
I disappeared down something of a rabbit hole a month ago when I looked at food companies and I read Robert Lustig’s book Metabolical and Hanna Purdy’s Could it be Insulin Resistance?
Lustig points out that although there is no scientific consensus on whether sugar plays a unique role in the development of obesity and diabetes. This statement is true, but further analysis reveals a more interesting truth. If you divide the papers published in academic journals between those funded by the food industry and those independently funded, then a curious pattern emerges. Of the 26 studies funded by food companies, none of them reveal sugar to play an unhealthy role. Of the 34 studies that were independently funded, 33 of the studies reveal that sugar consumption does play a role in obesity, diabetes etc.*
Public health policy is not something that I know much about, but it does strike me that the food industry could be facing a real shake-up over the next few years, and the pressure could come from Governments frustrated with their ballooning health care costs of aging populations or even ESG investors queasy about what goes into process food. Lustig quotes a study that reveals 80% of 600,000 processed food items tested in the USA, has had sugar added.
Some of the figures on the harm caused by poor diet are staggering. One in ten over 40 year olds has been diagnosed with type II diabetes in the UK (costing the NHS £14bn a year to treat). While in the US there are over 30 million people with the same condition (so presumably costing 10x more to treat.)
Even those figures don’t tell the full story. Multiples of that figure are likely to have developed insulin resistance. The difference between the two conditions is that fasting glucose levels are normal (so most people don’t know they are insulin resistant) particularly as they tend to be normal weight and exercise regularly. Instead of glucose, too much insulin is circulating in the blood stream for too long, which causes other symptoms not typically associated with diabetes… COPD, fibromyalgia, allergies, arthritis, IBS, skin problems like psoriasis, tinnitus, poor sleep and depression. Noticeably developed countries are seeing an epidemic of these symptoms, many of them related to inflammation and autoimmune system, and no one knows why. In the UK, around 2.5m people are now economically inactive due to ill health, the proportion of the working age population reporting long-term sick has risen to one in six or around 7m people, according to a recent Andy Haldane article in the FT. The cause of this is certainly not genetic, because genes don’t change that fast. It’s also unlikely to be air pollution, given how the air quality in major Western cities has improved from the days when winter smog used to kill tens of thousands of people.
Both authors (Lustig is an endocrinologist specialising in childhood diabetes, Purdy is a nurse) suggest that modern chronic ‘life style’ diseases may not be ‘drugable’ at all, but they are ‘foodable’. The way to improve health could be as simple as modest changes to diet (avoid sugar, avoid processed food, cut down on carbohydrates, intermittent fasting). Notice that exercise and calorie restriction are not on that list – because many people of normal weight and who exercise have developed insulin resistance from too much processed food. Often that food is marketed as ‘healthy – low in fat!’ but turns out to be high in sugar, emulsifiers, stabilisers, preservatives etc and lacks micronutrients.
Having a business model that takes basic (but healthy) food commodities, and adds value through processing and a marketing budget seems questionable going forward. Yet even the corporates that benefit from the business model, are not particularly profitable. In this article I point out that the UK supermarkets, which have also played a role by filling their shelves full of processed food and empty calories, report a Return on Capital Employed that struggles to rise above 10% according to financial database Sharepad. Kelloggs reports a 3 year average Cash Return on Capital Invested of 7.5%, and has struggled to grow revenue for the last decade. Berkshire Hathaway owns 26.5% of the company, which has been one of Buffett’s poorer investments: it cost Berkshire’s $10bn in 2015 versus the current market value of $12.2bn. Buffett later said he paid too much for Kraft, when it merged with Heinz.
It’s noticeable that car company marketing tends to show cars driving in the wild Scottish Highlands, or similar, not over crowded cities sitting in a traffic jam. Similarly high sugar cereals and processed food companies sponsor sporting events and associate themselves with fit and healthy looking people (McDonalds has sponsored the 2012 Olympics in the UK and their advertising, along with Coca Cola can be seen on the side of the football pitches at the current World Cup).
Marketing can not hide fundamental truths that we see every day with our own eyes; namely i) ICE cars are a wasteful and inefficient in cities ii) the population is becoming more unhealthy, with diet likely playing a part. Below is a chart from Sharepad showing that both Ford and Kellogg have underperformed the broader S&P 500 index over the last decade. Ford only started doing well when it developed a credible Electric Vehicle offering. That does give some hope that ‘big food’ can see if they keep pursuing their current business model of marketing and processed food, they will continue to underperform. Either they will change, or rival food companies will emerge with healthy alternatives.
If Lustig and Purdy are right, then their analysis also suggests bad news for the pharmaceutical and drug development companies: there’s been a massive miss allocation of capital, trying to treat inflammatory and autoimmune diseases when the root cause of chronic conditions is mitochondrial dysfunction (which convert food into energy in our cells). We’ve seen many big pharma companies and start-up healthcare companies focus on this area, because they know if they can get approvable for a drug that works the returns are likely to be strong. Over the last few decades drug development for treating these diseases has been mostly a story of expensive failure. The problem is fixable, at much lower cost, by focusing on diet, rather than developing drugs that alleviate symptoms, according to Purdy and Lustig.
Success as investor is often a case of knowing what to avoid. Similar to a healthy diet. It can also be valuable to be sceptical of institutionalised knowledge, question long accepted narratives and think about the incentives within academic publishing. Efficient Market Hypothesis anyone?
Scepticism of marketing and instead giving more weight to alternative sources of information, such as spliff smoking snowboarders is not normally advice you read in investor updates. For that reason, it may be valuable all the same.
*This exercise was carried out by Lustig’s colleague at UCSF Dean Schillinger.