We had a very interesting week in the capital markets as the big elephant in the room is clearly the poor stock performance of Apple. The stock is down nearly 40% from its high and the jump the ship analysts are running for the hills. Exxon-Mobile regained the title has the most valuable company in the world. Many investors are questioning whether Apple is the next Microsoft because the market value is so big (almost $500 billion) it will be hard for the stock to perform well. These kinds of questions are at the very heart of investing capital and require rational thinking.
You have to look at the past and the future and try to evaluate what is the most probable outcome. Will Apple's dominance suddenly be relinquished in the smartphone and tablet market? Is Samsung going to own the low end market in the emerging markets of China and India without competing products from Apple? Does Apple have the ability to create new and more innovative products which will capture the imagination of consumers on a global basis? Are there potential acquisitions Apple can make which can address product areas which are holes in their portfolio? Right now, the world is ending and the company is seen as a broken growth company. However, they just sold 50 million devices in three months and they have a cash hoard of nearly $150 billion. I should also point out if you have own one Apple in your lifetime you are very fortunate. It will probably be impossible for them to duplicate the kind of stock performance they had last 15 years. People are going to make up their minds one way or another, and it is really will be fascinating to watch how it plays out over the next one, three, and five years.
When people ask me what they should invest in now, I always like to start out by asking them what do they have expertise in? The reason why I ask that is because any time you have a knowledge advantage in specific business areas, you have an opportunity to benefit from your special background or training. Over the last few months, there were a few companies in a specific area of the market which I have a great deal of experience in. In fact, I am very confident no matter how many analysts there are on Wall Street, I am just as familiar with these industries and specific companies as they are. Consequently, when a few businesses were offered at attractive prices, or at least what I thought were good value, we spent our capital. The greatness of Warren Buffett is he emphasizes thinking for yourself and making decisions based on evaluating businesses. Many people who invest adopt the strategy of buying the same companies as other well known investors. If you are really a true practitioner of value investing using Buffett
type strategies, you find your own investments which offer compelling value. So an important point to consider is why even bother trying to beat the market?
The answer is actually very simple. When you look at investment results over a long period of time, lets say 5 years or more, the rewards an investor gets from doing better than a market index like the Dow, S&P 500, or Nasdaq by even 1% per year are incredibly large. There is a statistic from one of Buffett's annual shareholder letters which says that over 65 years, if you invested 10K and got the S&P return, your total market value would be around 950K. If you had beat the market by 10% a year, your market value would be around 95 million. So each percentage point per year is worth 9 million bucks of increased net worth. Many people say buy indexes and be happy with the market return, and in a lot of situations this is sound thinking. However, because the benefits of good performance are so large, if you can even do a little better than the market, I think the effort is certainly worth making (if you want the exact numbers I can send you the passage- just email me at firstname.lastname@example.org)
One of the more fascinating events on Wall Street this week was the confrontation which took place on CNBC between two legendary investors, Carl Icahn and Bill Ackman. If you want to see what happened, you can watch it here-http://www.cnbc.com/id/100408608. I would just say both are great investors, and each uses their own methods very successfully. They have a long history together, and there is plenty of animosity in their relationship. If you add the Herbalife short position which Ackman is involved in, the potential for conflict is genuine and it could only get worse. The Herbalife short position is another great story which most investors will be following over the next year. The Super Bowl has nothing on the conflict between Ackman and Icahn. Personally, I think ultimately Ackman will be proved correct.
Apple is revising the way it forecasts earnings-http://go.bloomberg.com/tech-blog/2013-01-23-apple-conservative-forecast/
Retailers are making large inroads in attracting customers to their apps-http://techcrunch.com/2013/01/25/mobile-shopping-apps/
Every time I read CFO.com I get valuable insight. If you are a business person, I cannot recommend it highly enough-
Thank you for reading, and I hope you have a great weekend and are happy and healthy.
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.
Disclosure: I am long BRK.B.