Apple (AAPL) 100 to 1 in the Stock Market

Apple

After buying Apple during the depths of the Tech Bubble Bust in 2003 around $6.94, I recently had to sell about ten years later around $700 for a compound annual return over 10 years of 58.5%. Eat your heart out Munger, Buffett, Soros, Graham, Tudor Jones, etc., etc.

And now what? 

Ok, Ok, I live in fantasy.  A friend recently said that he wished he had sold his Apple after buying it last year. Coulda, shoulda, woulda doesn’t advance your skills as an investor. What can we learn A Priori (before the fact) to help us as investors in finding and or managing our investments?  What lessons can be gleaned from Apple’s history? In Part 2: We will begin to prepare our case study file on Apple.

3 responses to “Apple (AAPL) 100 to 1 in the Stock Market

  1. Quite frankly, I don’t think that person who is quoted (whoever it is) is a great investor. Just buying something that goes up in price is not enough. The only way to truly see how “right” you were is to see how much money they actually ultimately produce for the shareholder over time.

    If I always buy a stock for $5, sell at $10, but then a year later, it goes to 0, should I be proud? I made money every single time.

    The risk with letting the market decide how right or wrong you are is that it’s not a good process, because they’re often flat out wrong. So, ultimately, it’s only worth the cash it produces, and then gets into the hand of the shareholder. If I have manager who happen to run a good business, but they find a way to squander away every penny, and for whatever reason an activist cannot “right” the wrong, then the profits are meaningless, because they continually get squandered away. It’s only worth the cash that it truly produces… at least that’s how it is with me. Others are free to do as they see fit.

    Let’s look at 3 things specific to Apple:

    1) The moat… great products/design/etc. can all be argued for. The challenge is that I have, personally, no clue on how enduring those are. I know that Coke’s distribution/scale/psychological (read Munger’s pitch on Coke) moats are suited to standing the test of time to the point where they said that even a “ham sandwich” could run the business. That’s a quality moat, because it’s enduring. I have no idea how long Apple’s moats will last, so I’m probably not the best potential shareholder for them.

    2) The excitement of what they do attracts others – there are significantly more people making phones with similar features today than 5 years ago. Google has an App store, Blackberry has an Android app store emulator, Microsoft has their own platform, and so on. While Apple has some fat margins, I have no idea if they’ll continue into the future.

    3) I have no idea how well Apple can allocate capital – will they ever shrink their company if that’s the right thing to do? Why do they hold so much cash? Why haven’t they done a giant 1-time dividend? Will they repurchase more shares at a low price than a higher price?

    Maybe Apple will develop a moat that I can understand one day – maybe it’s the App Store and how without scale, you don’t get developers, and without apps that they make, you don’t get users. I could see something there. Maybe this turns into a Coke/Pepsi oligopoly thing with Android/iOS as the 2 choices. I just know that I’m not going to be good at predicting this one and so I’m staying out of it – once it’s built, I might be interested if I like it, but it’s just not my cup of tea right now, and so quite frankly, I don’t care if others made 100x their money on it. I’m happier handicapping my investments, because it limits me to the things I actually have some clue on, not that it’s ever much anyway :)

    Excuse any rudeness.

    • I want to add 1 more item regarding the moat. Even if we had seen that Apple would create something great 10-15 years ago, could we have seen the potential of a moat forming?

      You would have to have predicted the surge in adoption for the digital devices and design/engineering on others. You would have then had to have foreseen the creation of Apps, then an “App Store,” and so on. Even with the first iPhone, a lot of things were browser based – they didn’t yet focus on creating Apps.

      In most of these businesses, we’re buying future earnings, and a moat is so valuable for that reason. Just because a firm earned $20 in profit this year and you paid 5x earnings doesn’t say much, because those earnings could mean-revert as competition enters the market place. Once those $20 of earnings suddenly drop to a “normalized” $3, your purchase price is now at something like 30x earnings. The point is that there are a lot of variables involved and so at least for someone with my limited knowledge, there is too much speculation with Apple back at that time, even at those prices. Even if it was a Graham net-net, I’d have no way of knowing that capital would be allocated wisely and/or profitability would return, because there’s always the risk of the company staying in operation till every dollar in the bank account has been spent. In the world of private businesses, they’re far more likely to shut down long before the cash is depleted. The shareholders aren’t just an external “nuisance” every 3 months on the quarterly call there.

  2. Thanks, excellent posts. Apple is an unusual situation where you have the intrinsic value moving higher than the price for many years before the price then caught up and perhaps surpassed the IV. However, unless you had some special insight/knowledge into the technology and/or Steve Jobs, I don’t see how you could have foreseen Apple’s tremendous success.
    See next post.

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