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Five Intellectual Sloppiness Of Mr. Market

|Includes:Apple Inc. (AAPL)

That's a strange feeling I want to share: I am an AAPL long but I have been sleeping well last two nights. I look at the red figure on the quote. It goes down again. I know many people feel pain. I feel some but after consider the situation for a while, I don't feel any.

If you are curious, here is why. Mr. Market was not thinking intellectually in the last two days. But surprise! it never did. Not before we got our positions in Apple, and will never be in future.

People who bash themselves now is in a certain kind of trading mindset. Yes, if you think in this way, Apple is a bad speculation. It's filled with emotion now and it makes it even harder to decide the direction of its stocks.

But for a long term guy like me, thinking in the time-span for 5 years. There are much intellectual sloppiness with Mr. Market right now and I want to exploit them. Some will describe that I might have a confirmation bias. But again, if I don't care about Mr. Market , why do I care what some are thinking?

So let me go ahead to name three of these sloppiness.

The first intellectual sloppiness is to say Apple is following the pattern of Microsoft and Cisco in the past. If you look at the shape of the charts, yeah, they look the same. But once you think the next 5 years, you will notice a very important difference: the valuation of Apple is much lower. So let's just say the statement "all tech. giants are going to fall a period of time before it goes up again" is right. We should expect Apple has a shorter recovering time. Simply because the initial condition is different.

The second is to compare Apple with Seagate, then imply that is a bad thing. This argument, comes from Michael Fu, is mainly from his self-bashing of losing 20% in Apple.

First of all, Seagate is sort of nice, harddrives are still on demand, not on the laptop market but the server side, enterprise market. Because of big data, they need tons of disc space. So Fu's argument, actually make me want to buy some Seagate as well.

Then, there is "oh, P/E can actually get compress to 6, are you scared now?" Nope. Even if that is the case, Apple was going through that kind of history much more rapidly. So let's say we really talk about the P/E go to 6. (i.e. $300 /share), you would expect the whole company recover more rapidly than Seagate, especially given the cash the company has.

Also..... another important point here you should consider. Let's say Apple is following the Chartist Y's Z pattern and goes down indefinitely. What is the point that it doesn't matter if you own Apple or own Cash? Well, for now the answer seems to be around $140 because every share of Apple worth $140.

Of course, this type of book value consideration is dangerous because you never know how the company condition has changed. But in the case of Apple, are we sure we see any bad management, shenanigans? I don't, so I can only feel happy when it really goes down to $140.

The third is to believe in Amazon more than in Apple. Once you look into the business of both Apple and Amazon, you can only conclude that both are secretive and you must admit we both don't know too much. Some how, the Market seem to believe the Amazon will have a way to increase margin at will. So the Market decides to pay more premium for it.

Cash is king, it is a powerful weapon which allows dividends, stock repurchase happen. Apple has $130B, Amazon has $5B. To wear future problems, I count on cash, but not how Mr. Market think.

The forth is to believe Apple is not well-run. For all indications, it seems to be a more predictable company financially given Tim Cook is at helm. The wrong people (Forstall, the retail guy) were gone, the right people is promoted (Ive). Secrecy was maintained (The security leaked product information was let go). So we are still looking at the Apple we know: secretive, hard to predict and up-and-coming.

Another thing what Cook has been telling us is soothing:

"The most important thing to Apple is to make the best products in the world that enrich customers' lives. That's our high order bit. That means that we aren't interested in revenue for revenue's sake. We can put the Apple brand on a lot of things and sell a lot more stuff, but that's not what we're here for. We want to make only the best products."

That is always the true moat of Apple and it hasn't losed it at all.

The fifth is to believe the market price is an indication of a company health. If you are into short-term trading, you would think what I am saying is hearsay. But I am talking about 5 years, so all my arguments are all about value-investing, which is very different from the usual growth-investing you used to on Apple. As a value guy, you should notice that Apple has valuable assets tangible and intangible.

It's balance sheet we don't need to talk more. For the intangible part, has great brand-value. You should also notice that a lot of kids want to use Apple. It's not going to change. So if you are into brand such as Gap, Levis, Coca-Cola and believe those are long term buy. Then Apple is for you.

It also has great ecosystem. What that means is that is not just locking customers in a certain environment. But also allow new type of device to be incorporated.

* * *

So what am I going to do? It will sound desperate to some of you but here is my strategy: I am going to implement certain kind of dollar-cost averaging on Apple. Here is the interesting part: I predict in short-term, the stock is going down but my strategy is to buy more.

In particular, provided the company is in its healthy state, I might buy a little bit more if Apple's price goes down to $300 (33% down from now), $225 (50% down from now) and $150 (66% down from now).

Here is why I want to do this. For the dollar-cost averaging part I have been holding the stock since 2009. I bought some every year. So this is just my routine strategy anyway.

Another reason is this : I too cannot foresee when Apple will recover. Given that I cannot predict timing, I decide to spread the risk across time.

For the price point: $300 is when Apple goes down to around P/E = 6, $150 is approximately the cash Apple has. So in a way, I am prepared for the worst negativity from Mr. Market.

Also, I decide to hold Apple for a while. In the past, I did consider the stocks in 2013 or 2014. For now, I am thinking of holding it for another 5 years. The reason, as I said at the beginning, is that Mr. Market is being irrational on the stock. Mind you, it can get worst! If you see such an irrationality, that's a signal to buy. I expect it will be a long process but it would be a profitable one.

So you may ask...... eventually, would the rational guy, Mr. Value won over in my life time? (Probably another 25 to 30 years.) I don't know. What I know is being lucky/unlucky in short terms is uncontrollable process. Being lucky/unlucky in long term when time tends to infinity, it's something predictable. The health of a company would give you a clear indication. In the case of Apple, I can only see a well-run, innovative company filled with possibilities. That's why I am making such a decision.

The final question you may ask is "Is it because you got stuck with Apple, so you turn from a growth guy to a value guy?" I ask myself those questions as well.

It lies on Sloppiness #1: Apple already presents itself as a P/E=10 company to me. Let's say if I bought MSFT or CSCO at P/E=50, but I decide not to sell, I think I was having a confirmation bias. In those cases, keep on buying when stocks price plunge are ..... really sucker bets.

On the other hand, you can observe how P/E look like for Apple. The transition is smoother, as well as it goes to a kind of profitable stage eariler than cases such Seagate. So now the question is whether you want to buy it for Value? As I have been buying the stock already, it just seems natural to go on.

So let's see how it goes.


Disclosure: I am long AAPL.

Stocks: AAPL