- The "popular narrative" regarding AAPL stock is severely flawed and subject to powerful psychological biases.
- The death of Steve Jobs, the rapid decline of BlackBerry, and the rapid advance of Android OS have produced a herd that is severely affecting AAPL stock.
- The combination of the recency bias, representativeness heuristic, availability heuristic, and the confirmation bias form a "lollapalooza effect" surrounding AAPL stock.
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.
The "lollapalooza effect" is a term coined by Warren Buffett's partner at Berkshire Hathaway, Charlie Munger. The effect results from the unusual circumstances alluded to by Buffett in the opening quote - unusual circumstances which lead to multiple cognitive biases (systematic errors in reasoning) influencing a given situation in dynamic ways.
Apple's (NASDAQ:AAPL) unusual circumstances
The unusual circumstances surrounding Apple are as follows: the death of Steve Jobs, the rapid decline of BlackBerry, and the rapid advance of Android OS and handset maker Samsung in particular. These unusual circumstances have been woven together into a popular narrative that I will break down. This narrative sparked a mob mentality and drove Apple's share price from its high of $700 down to just below $400 (a decline of over 40%).
Recently, Apple's share price has recovered a significant portion of its losses (now trading at around $630), but the majority of analysts are still replacing many popular memes with actual thought and are unduly pessimistic regarding the innovative future of Apple Inc.
A brief reminder of the pessimism surrounding Apple Inc. near the bottom of its stock price decline from All Things Digital 2013:
Walt Mossberg (paraphrase):
A lot has happened between this year and last year. I'm not going to list a million things, but...
- Competition in the phone business (Samsung) seems to have grown stronger
- Android apps are taking over
- You're being beaten up by various governments over various things
- Your stock is down significantly
- And there's a sense that Apple may have lost their cool - that Samsung has got the cool now.
So that leads me to my first question:
Is Apple in trouble?
That's the question that was on most investors' minds at the time.
The plausible story (or meme)
Apple died when Steve Jobs died.
The plausible evidence
Android global market share increasing at a rapid pace.
The plausible anecdote
BlackBerry (NASDAQ:BBRY) held approximately 40% of smartphone market share at its height before Apple rose and dethroned it - precipitating the demise of BlackBerry. At the present moment, Apple holds roughly 40% of the US smartphone market and Android appears to be poised to dethrone it based on global market share figures.
The popular narrative
Combining these three features we have the popular narrative: Apple died when Steve Jobs died. They are no longer innovative; when was the last time they released a "wow" product? Samsung is taking everything over now and will destroy Apple just as Apple destroyed BlackBerry.
The representativeness heuristic
Investors predicting the demise of Apple on the basis of Android's rise and BlackBerry's fall are likely under the influence of the prevalent "representativeness heuristic". Representativeness results from a common unconscious psychological tendency to substitute hard questions for easier ones. In this case, the hard question regarding probability or likelihood (of Apple's demise) is replaced by the much simpler question of similarity.
Android's rise was similar to, or representative of Apple's rise (which also caused BlackBerry's fall) so investors assumed that the rise of Android also meant the fall of Apple - and that is where the research stopped for many analysts. BlackBerry didn't have the iPod, iPhone, iPad, Mac, iTunes, depth of product ecosystem, top ranked products (customer satisfaction), top ranked usage of products, growing sales, and a dominant App Store. Apple is a very different company than BlackBerry and analysts who cite the anecdote of BlackBerry's fall in order to defend the popular narrative are comparing apples and oranges, or better yet Apples and BlackBerrys (cheesy I know). Furthermore, Apple built a product (the iPhone) which completely leapfrogged the BlackBerry and all other prior "smart" phones - Android has some amazing phones on the market no doubt, but none of them are anywhere near leapfrogging the iPhone in the same way that the iPhone defined the smartphone category back when it was launched.
The death of Steve Jobs was also representative of Apple falling apart the last time Steve Jobs left the company in 1985. The problem with those proclaiming the death of Apple because the company verged on bankruptcy the last time Steve left is that they are forgetting that Steve Jobs left Apple as merely a 30-year-old visionary back in 1985. Steve Jobs then built the most successful animation studio (Pixar) and a new computer company, NeXT. When Apple bought NeXT in 1996, Steve Jobs returned to Apple as both a brilliant visionary and leader. Jobs gave an incredible amount of autonomy, control, and power to his "spiritual partner" at Apple (Jony Ive) who shares Steve's minimalist, intuitive, design-first philosophy and also was a major driving force behind the creation of the iPod, iPhone, and iPad. Jobs then gave the CEO position to a brilliant, though not-so-charismatic or visionary leader - Tim Cook. This move was genius as it allows the creative visionaries of the company such as Jony Ive to focus on the creative and visionary aspects of the company - and it allows the operations and business guys such as Tim Cook to focus on the actual business. The Steve Jobs who returned to Apple in 1996 was an entirely different beast than the Steve Jobs who was fired at age 30 in 1985, and Apple is an entirely different beast now than it was in the late 1990s when it verged on bankruptcy. As such, simple claims of "Apple died when Steve Jobs died" and "Apple fell apart the last time Steve left, therefore it will fall apart again" are really surface level analyses that are missing the important nuances of the big picture.
Recency and availability
I believe the popular narrative has become so widely accepted due to the extreme "recency" and "availability" of its component parts.
First a couple of definitions:
Recency bias - recent information is given disproportionately more weight for decision making than less recent information.
Availability heuristic - the frequency of an event occurring is estimated by "the ease with which instances come to mind."(Daniel Kahneman)
Availability is enhanced when emotions are aroused: this contributes to why people dramatically overestimate the likelihood of dying from shark attacks and plane crashes and underestimate the likelihood of dying by Mosquitoes for instance.
The death of Steve Jobs, a household name and described by many as the greatest entrepreneur in a generation, had a strong emotional impact on anyone who followed the story and was also talked about ad nauseum in the media afterwards (with books shortly after being published on Steve Jobs and movies and documentaries being made about him).
Furthermore, the demise of the once great BlackBerry is still burned deeply into most investors' minds and was also (and still is) a frequent occupier of the investing media's time. Every serious investor knows the story of the rapid decline of BlackBerry and has either been hurt directly from BlackBerry's share price collapse, or knows someone who has.
Therefore the rise of Android, the death of Steve Jobs, and the rapid decline of BlackBerry have all the markings of potent recency bias and availability and I believe this perfect storm of unusual circumstances has led to very strong biases surrounding the stock and have led to the so-called lollapalooza effect.
Market share, market share, market share
It's all about the market share. Or is it? I like to think of investment theses as a form of scientific hypothesis that is being put to the test in open markets in real time. The quick rise of Android OS leads to two primary competing explanations for its rise: Preference versus Price.
The conclusion that most analysts drew from Android's rapidly increasing global market share was that new innovation by the company had led to a change in tastes: customers now prefer the more innovative Samsung phones.
Hypothesis 1 (price) - If Android is dominating Apple in terms of global market share due to price (cheaper Android handsets flooding the market), then we should observe that the poorer developing countries lead the way in terms of Android dominating their markets. Under this scenario, Apple should still dominate the "high end" market in developing countries, and should also maintain its dominant position in the wealthier developed countries. Furthermore, Apple should still come out ahead of the competition in terms of usage of their products and customer satisfaction ratings.
Hypothesis 2 (preference) - If Android is dominating Apple in terms of global market share due to consumers preferring a clearly superior product (as purported by numerous analysts), then we should find that both developed and developing countries alike strongly prefer Android OS. We should also find Android products scoring higher than Apple products in categories such as customer satisfaction and usage (how often the customers actually use the products).
Clearly the observations implied by Hypothesis 1 are what we observe in the real world. Apple is not only maintaining its market share in developed markets, but is actually increasing it in the US for example. And as previously mentioned, Apple dominates Android in terms of customer satisfaction and usage ratings. The markets in which Apple is being "destroyed" by Android are markets where an Apple iPhone costs many months worth of an average worker's salary. And if one looks at a dollar adjusted market share to get a sense of which OS has the largest amount of dollars flowing into it, the picture once again comes out in favour of iOS.
If less wealthy consumers are primarily purchasing Android handsets based on price, rather than preference, then Apple is not in nearly as much trouble as global market share figures would suggest.
I think analysts who have bought the popular narrative then seek to confirm their narrative by citing memes such as "global market share" and "no new products" as well as "Apple fell apart last time Jobs left!" are obviously under the influence of the confirmation bias. The confirmation bias can be an extremely powerful form of investment bias in which investors actively seek out information that supports their investment thesis and actively avoid information that doesn't support it. Instead of digging deeper into the market share numbers to see what customer data are really trying to tell us, many of these analysts just blindly parrot the statistics that appear to support their view.
The confirmation bias is clearly at play when analysts worry about the innovative potential of Apple based on the lack of new product categories since Steve Jobs' death. Apple has always been intensely secretive about all of its major "category buster" products, and here is the timeline for the last three of them:
iPod - October 2001
iPhone - June 2007
iPad - April 2010
As you can see, there was a 6 year gap between the iPod and the iPhone, and there was a 3 year gap between the iPhone and the iPad. Why then were analysts proclaiming the death of innovation at Apple throughout 2012-present on the basis of no new product categories? We should not have been expecting anything revolutionary in 2012. And as the timeline shows, we should be expecting a new category buster any day now - and indeed iWatch rumours are firing up and Tim Cook has promised new product categories in 2014.
Ultimately my view is as such: unduly pessimistic analysts used the lack of a game changer to confirm their suspicions of Apple no longer being innovative - and with Jobs dead they draw the connection between a lack of new products since Jobs' death and assumed it's because Steve Jobs was Apple.
Apple is my second largest holding, and I am subject to psychological bias just like everyone else. This article clearly reflects my (biased) opinions. I believe, however, that by taking measured steps to become more mindful of our cognitive shortfalls and to systematically minimize the impact of bias in our investing, we can use contrarian investing philosophies to take advantage of the herd when lollapalooza effects are driving their collective behavior.