Take Apple (AAPL) at any time in history - it has always just undergone massive share price increases. No matter which time frame you look at, Apple is always trending up. Sure, you can zoom into individual sections where it has moved down slightly, but Apple is now at its highest level ever so there is no point in time at which you could have bought Apple stock and be losing money if you still held it now.
The real question is, will this growth continue? For some reason Apple keeps beating expectations; and not just beating them, destroying them! The belief is always that they might have exhausted the possibilities for development. Apple exists in a market where only the best product will sell, and new products quickly become old products. Innovation is essential to keep consumers interested and stay on top. The risk lies in Apple's ability to consistently innovate, and remain the market leader.
Apple's share price is not as high as it could be, in fact its P/E is quite low (13.35 at the time of writing), and it is probably because of the belief in this risk of an end to innovation. I believe that this issue comes back to the old coin-tossing example. You toss a coin once and it turns out heads, you toss it again and it's heads again, you toss it a third time and (you can guess where this is going), it's heads again. Most people, based on intuition, will at this point bet that the next toss will be tails. It seems obvious. It has been heads so often that surely it must now be tails? Clearly we all know that this is wrong, and the chance of heads a fourth time is equally as probable as heads the first time; coin tosses are 50/50 (or are they?). Now take this back to the Apple example. A great product takes an innovator to come up with the idea, and then it goes through a long process of development before it is released. Apple's main rival in most fields is probably Microsoft (MSFT) so let's say for example that Apple and Microsoft toss a coin for the next revolutionary product, it's purely a 50/50 as to who comes up with it. Apple has been winning the toss in the past, constantly, and this is why I think that people believe it cannot continue. Surely, given Apple's consistent success in innovation, they cannot be the ones who make the next new product, and then the next, and the next?
I think however that quite the reverse is true. If you ignore the past and look at the situation now, who is the best placed to come up with revolutionary and innovative technology? Apple has been increasing its workforce massively over the past few years (a rate of 28.1%); it already has predefined structures for innovation of new products, and efficient methods for developing them and putting them into production. Not only that, but it also has an enormous amount of cash sitting around, free to be used for any sort of research that might be necessary. Microsoft doesn't have the money, but crucially it lacks the culture of innovation at Apple, making the coin toss analogy hugely biased towards Apple. Clearly, if it comes down to probability, Apple is much more likely to make the next great product than anyone else.
So, after its huge run over the past few weeks (11% gain this month, at the time of writing), everybody is kicking themselves. Those who haven't bought Apple, and who have been considering it daily for months (as I'm sure many readers of this have) will hate themselves that they finally didn't take the plunge, and those who already have Apple positions will wish that they'd increased that position. Why? Because clearly it was obvious that Apple shares were going to do well. Looking back, how could they have not succeeded?
Over the next few weeks most speculators expect a pull-back in the share price, and many convince themselves that they will increase their position when this occurs. But what if it doesn't? Apple will soon be releasing a set of new products, including the iPad 3, and in the run up to that speculation may push the stock higher. It has also been ignoring the influences of (and continuing to rise during) issues such as the Greek talks and the wider crisis. The sentiment amongst Apple shareholders is exactly the same as now as it has been for years. Everyone is tipping them. If everyone believes so strongly that a stock will go up, the stock is performing incredibly well (at record levels) and it is completely ignoring all negative influences, then why should it not?
Of course, as with any stock purchase, one can reduce personal profit to a probability. It seems to me however that this probability is hugely weighted in favor of he who buys the stock. There are so many reasons why the price might increase, and given analysts price targets, that increase could be quite large. The downside? Well there is potential for a claw back in price, but could it really fall to December levels given the incredible results that have just been released? The only way that seems possible is if the entire economy crumbles, and if that is going to happen then you might as well take your money out of the markets altogether.
At every point over the last few years, stock pickers have wished that they bought Apple just a few months ago. Apple is performing stronger than ever and so there is no reason why that shouldn't continue. Of course, it is on an enormous run at the moment so speculators don't buy because surely it can't go any higher. But that precise argument is what has stopped so many people making so much money over the past few years. Take the plunge, ignore your instinct to fall into the heads or tails probability trap, and reap the rewards of owning AAPL.
Disclosure: I am long AAPL.
