I think most investors would agree that the one stock that attracted the most attention on Earth over the past 10 years is Apple (AAPL). The company's new products launched every year are some of the hottest gadgets for electronic consumers. As a result, the price of each Apple share has soared 108 times from the low of $6.50 (price after adjustments for stock splits shown in Yahoo Financial) in April 2003 to a high of $705.07 in September 2012. In fact, the company broke the all-time world record for a stock's market capitalization in August.
As we investors cheer about the company's success and enjoy the exciting discussions about the stock every day, I think it is also important for us to learn something from this 10-year history of Apple that we can apply to our future investments.
As a die-hard fan of Warren Buffett and a practitioner of value investing, I found several important investment lessons in Apple that are perfect examples of some of Buffett's most famous quotes. Here is the list of Buffett's quotes and corresponding manifests in Apple:
1. "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Today, many people have abandoned the long-term and fundamental-based investment approach and instead trade stocks simply by eye-balling stock charts every day and trying to spot technical trends that they think will continue. As a result, time after time many traders chase momentum and hot trends to buy an overly hyped stock with super-high valuation multiples trading at a multi-year high, and they sell an overly depressed stock with lower-than-average valuation multiples at a multi-year low.
This was exactly what many people did to Apple's stock in March 2000 and April 2003 as shown in Figure 1. The case in April 2003 was a little more complicated in that the stock's valuation level actually was still not cheap. However, there were major business developments that pointed to fast-improving financial results going forward and served as strong reasons for traders not to follow the trend to sell the stock at a multi-year low at that time. The important lesson to keep in mind is that blindly following the herd can be very dangerous because history has taught us that the market can be greatly inefficient and significantly misprice certain assets at times. History has also taught us that an enormously overpriced or underpriced asset rarely stays mispriced for longer than two years, as evidenced by Apple's rise, fall, and rise again during the period shown in Figure 1. It is normally the case that a stock starts to reverse course and trade downward when the largest number of analysts and stock commentators tell investors to buy it, as shown in the demise of Netflix (NFLX) last year. It is also normally the case that a stock starts to reverse course and trade upward when the largest number of analysts and stock commentators tell investors to sell it, as evidenced by some Chinese small caps with strong business fundamentals earlier this year. It is therefore not surprising that the biggest gains belong to those who have the guts and wisdom to bet against the crowd when the crowd is enormously wrong on its valuation of a stock, as Buffett has shown us.
2. "If past history was all there was to the game, the richest people would be librarians." Related to the first point, the main reason that so many people made completely wrong judgments on Apple's stock in these two cases was because they relied too heavily on trending. The thinking that a stock's price will always continue to follow the trend established in the past is the well-studied and documented anchoring bias in forecasting. The ubiquity of the anchoring bias and the increasing percentage of the participants in the stock market today who are short-term traders has resulted in many people paying little respect to a company's fundamentals over a long period of time and simply chasing after stocks that are hyped by Wall Street and that exhibit extended upward trends and dumping stocks that are bashed by all analysts for exhibiting extended downward trends.
3. "The investor of today does not profit from yesterday's growth." If there is any mistake as serious as buying a stock at a multi-year high or selling a stock at a multi-year low, it is taking a profit too early and missing a major portion of a stock's long-term appreciation. Apple's upward run started in early 2003 and lasted almost four years to December 2007. During this period, the stock gained a whopping 1,440% from $13 to $130! The stock's next long-term upswing started from January 2009 and lasted almost four years again to September 2012. During this period, the stock gained another whopping 800% from $78 to over $700. People who took profits early during these two long-term upswings deeply regretted their transactions, as shown in Figure 2. At times, a stock's performance will lag a company's business performance for a while. For example, the first Apple iPod was released in November 2001 and the product sold very well out of gate. However, the stock started taking off almost two years later. The first IPhone came out in June 2007 and gave Apple a further boost in revenue. However, the stock again spent almost two years going nowhere and then started shooting up again in mid-2009. Investors who lost their patience after waiting for two years finally surrendered their shares only to see the stock muscle out outsized gains over the following years. Only the few who had the determination to stay the course eventually enjoyed the outsized gains delivered by the stock. No wonder Buffet said that most investors today do not profit from yesterday's growth.
4. "If a business does well, the stock eventually follows." The underling force that caused many investors to commit the type of forecasting error mentioned in the previous point is again the anchoring bias. The thinking that a stock's price will always be constrained within a trading range and will not break certain "resistances" established over a period of time in the immediate past simply don't hold true when there is major change in a company's business processes or products and/or the industry. Three Apple products-iPod, iPhone, and iPad-completed changed the definition of mobile entertainment and communication and the way people use these tools. When the company has such a strong competitive advantage and products that have strong demand and cannot be replaced easily, no technical resistance can keep its stock from eventually flying higher. The quote from Buffett is really the best medicine to cure the mistake of selling too early in a stock's long-term strong upswing. If a business does well, then stick to its stock because the stock will soon follow and do well, too.
5. "There seems to be some perverse human characteristic that likes to make easy things difficult. The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective." During the 10 years of Apple's long upswing, there were constantly new concerns every month. These included issues that related directly to the company or its products, such as product launch delays for up to several months, software glitches, component defects, perceptions of prices too high or too low for new products, and privacy concerns. Then there were broader concerns about its industry or the general economy, such as competitors launching new products to mimic Apple's but sold at lower prices, world smart phone sales growth rates lower than expected for one quarter, inflation ticking up for a couple months, GDP growth lower than expected for a couple quarters, etc. It turns out that the majority of all these were really fake concerns and noises flowing into a market trying to tell people to sell.
Over the past 20 years or so, financial models used by Wall Street financial engineers and analysts have grown bigger and more complicated. Many new trading strategies come out every month borrowing new ideas from quantitative analysis, psychology, gaming, sociology, politics, and so forth. Well, it turns out that the simplest trading strategy that has stood the test of time over hundreds of years still delivered the best result in Apple's case. I have not heard anybody daring to show actual trading records on Apple based on any other strategies that beat the jaw-dropping 10,700% return generated from buying at $6.50 (price after adjustments for stock splits, as shown in Yahoo Financial) in April 2003 and selling at $705 in September 2012r. With the exception of the 2008 crash, people who sold the stock at other times often bought the share back later at an equal or higher price, thus wasting time, energy, and money going out and coming back in.
In conclusion, Apple provides all participants in the stock market with a vivid and strong reminder of the priceless advice from the most successful investor on Earth. Microsoft (MSFT) gave us a similar example in the 1990s. The world economy and financial markets were in chaos over the past decade, and the investment world has become dominated by super-big funds and I-banks; daunting computer models and programs; complicated financial products, including advanced derivatives; and a flood of information on the Internet every day. As a result, most people have given up on long-term investing and value investing and instead fall prey to tiresome day trading or just following the herd to chase hot hypes on Wall Street.
Evidence has proven that the biggest return on investment is not generated from technical trading, short-term trading, buying and holding the stock of a world famous company that is already big in size, or buying a stable stock that offers a reasonable dividend yield. The highest return is achieved by buying and holding the stock of a company with great products/services and a strong foundation when the company is young and has only a small share of its market or when its market is at a fledging stage with a huge room to grow. As Buffet says, for die-hard followers of value investing who know exactly what they are investing in, too much of a good thing can be wonderful.