When my wife was 6 months pregnant with our first child, she asked me a random question while I was in the middle of watching an NFL game. She asked "honey, do these clothes make me look fat to you?" Without thinking too much, I answered that "it is all good dear, I'm very confident that you will fit in your clothes again in no time.". Took me a few days to figure out why such an honest answer would unleash such a passionate and simple response like silence; it was very deafening.
For those of you who have read my short thesis on Research in Motion (RIMM) and have also read most of the colorful discussions within the articles, you will know that I truly understand what it is like to have a contrarian point of view on a company that may be very well liked. However, why is it so difficult to find a sound article that has a contrarian view on Apple (AAPL)? If there was a good bearish article on Apple, how do we know if it is worth our time to worry about it?
Given that Apple is widely followed here on SA and given that it will be releasing earnings in a few weeks, it would not be a surprise to see articles about "regression to the mean", "channel checks," or "supply constraints". Is it really that difficult to understand the "cult" of Mac?
Before we delve into the topic, consider the image below. Which square has the darkest circle within it?
Or consider the image below; would you believe me if I told you that there are no curve lines in the image? Go ahead, grab a ruler if you don't believe me.
I would humbly suggest that the answer lies in:
1. Our ability (or refusal) to understand the validity and soundness of an argument that has been presented before us. Conversely, we also need to understand that an argument can be structurally valid but it may not be sound. Allow me to illustrate...
Here is the first part of a typical argument:
Apple generates $473K/year in revenue per employee (true) [and] Tim Cook receives $570M in stock grants (true) while employees earn zero commission (true).
Selectively followed up by (interestingly enough, a quote from a respected Business School):
Conveniently, there was no elaboration made on the next paragraph:
For each company, the logic is the same - there is a line of people eager to take the job. In effect, we're saying that our value judgments depend on the circumstances of the employee, not just supply and demand of the labor market.
Therefore, the article leaves you with an impression that: "Apple is short changing its retail staff."
As you can see, most of the premise in the argument presented is structurally "valid" as it uses known facts to build its case. However, it loses its "soundness" as soon as it introduces a few subtle generalities (e.g. "we find it offensive") that aren't the truth.
Do all single mothers working at Wal-Mart find it offensive to work there at $9/hr? Do all employees at Apple find it offensive to work there at $12/hr? Is the Wal-Mart brand and experience the same as Apple?
Has David Segal ever worked in retail to understand that "selling" at an Apple store isn't the same as "selling" at Tiffany's? Remember Mike Daisy? When does a "logical" lie become the truth?
2. Our ability to recognize and appreciate that Apple is an "outlier". An outlier is defined as:
An outlying observation, or outlier, is one that appears to deviate markedly from other members of the sample in which it occurs.
To put that definition in the context of this article, if you were to scan for US stocks that had revenue and EPS growth of more than 30% during the past 5 years, you will get 104 results out of 6,837 stocks. However, if you added a criteria to search for only large caps (>$200B), guess how many stocks show up?
I do realize that the results will vary depending on what metrics you use. However, I wanted to point out that:
- We sometimes spend too much time and effort finding the next "Apple" when the next "Apple" may be Apple itself.
- We cannot expect everyone to understand what makes Apple click because they will always look at it as an "aberration" that will revert to the "mean".
- There will always be "fear merchants" with no skin in the game using the pen to garner your eyeballs.
As I've written before...no stock ever goes up in a perfect straight line forever. I've been accused of "making it look too easy" when I wrote that we got our first buy signal here since we closed our last trading position this year. I've always maintained that I don't sell any snake oil; I call it as it is.
3. The Truth hurts and Lies soothes.
What is the Gartner group? Why is it highly quoted in the IT circles? Here is a blog and a link about the Gartner Group that will give you a different perspective. Who is telling the truth? Unfortunately, when "established" firms like Gartner are quoted, the indirect implication is that the deduction must be true. A blogger writing about the "gloom and doom" will most likely have a bigger following (as it appeals to the current sentiment) compared to a blogger who isn't (as we would conclude that he/she must be on drugs not to see the trouble brewing).
What do raising these issues have anything to do with making money on stocks? Our perception of the world around us (information, sight, smell, noise, etc...) dictates our actions or the lack of. In trading or investing, our ability to separate the noise from the truth may be the difference between being successful at it or not.
Let me close this article by giving you another example of the "noise" investors have to put up with. I've taken the liberty of mixing up some of the current headlines you may have seen about the iPad mini and the conclusion it wants you to have...
Apple may have a smaller iPad by the end of the year. However, Steve Jobs said he disliked it. Therefore, Apple without Steve sucks and Tim is screwing up a good thing or conclude that it may not work at all and will be a failure as it will cannibalize the current iPads' market share (and hence, margins).
Do we really need to bring up Jobs' perspective literally? How well did we really know the guy? If we didn't appreciate and "get" him then what makes us think we "get" him now? Didn't he say Apple won't do tablets as well or phones?
Instead of fretting over the possibility of an iPad mini (and the stock's reaction due the expected analysts' concern over it), I would prefer to ask myself "how will an iPad mini" benefit Apple and what trading opportunity may come out of it. An 8GB $299 mini iPad wouldn't be a surprise, it follows the strategy of "containment" - controlling the opponents' advance while expanding itself.
From a price point perspective, with the iPad2 giving way to the Retina display iPads, there is room in the $299 to $499 range. Which price range will the future competitor come in at? Can the lower end Surface be as good as a similarly priced iPad? Will Microsoft (MSFT) even release the sales data related to Surface?
The "Cult of Mac" isn't really as complicated as the pretenders may want you to believe. Simply..."Fanboys" do not tolerate sensationalistic opinions bashing Apple spun as facts.
Additional disclosure: Short RIMM.