Apple and Mr. Market
Posted by Jeff Tue, 06 May 2008 22:48:00 GMT
It was more than 50 years ago (1949) that Benjamin Graham published the Intelligent Investor.
I am happy to report that - as far as I can see, despite the invention of TVs, the Internet, and real-time trading, Human nature in the Market has not changed at all in 50 years and people are just as emotional and impulsive as they were in 1949. Oh - and Efficient Market Theory? - needless to say, I’m not a fan.
What Graham said: Imagine that “one of your partners, named Mr. Market, is very obliging indeed. Every day he tells you that he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.” (Intelligent Investor p.204)
Irrational pricing of stocks? Let’s talk about Apple (Disclaimer: I own Apple). Near the end of last year, hype of the iPhone and iPod Nano launches led to an Apple ROCKET. We saw the stock go up from $122 (Aug 17, 2007) to $198 (Dec 31, 2007) in just 4 months. This was based on great sales combined with expectations that Apple will come up with a 3G iPhone and maybe snazzier Macs in MacWorld in January.
And then what happened? 1) NO 3G iPhone, and 2) the country is going to be in a recession is going to affect sales. Stock TANKs to $119 (Feb 22, 2008)
OK - so let’s take a look at these items a little closer. The issue of the ‘3G iPhone’ - it is clear to me that there is no doubt that Apple is going to come out with a second generation iPhone with 3G technology and probably GPS also. This will probably happen in June or December 08. Is Apple going to loose their competitive edge because they didn’t come out with it in ‘07? Have you played with the iPhone? That thing is an innovation freak of nature: I think it’s going to take companies at least 18 months to come up with a comparable product, the iPhone is just way ahead of its time. What about earnings? Sure, earnings will be lower than if Apple came out with the 3G iPhone, but that will only be temporary, until they get the 3G version made.
Now let’s take a look at talks of a recession. Last time I checked people who buy Apple products are well-off individuals who are buying electronic gadgets. My argument is that most people who are considering buying Apple products are not going to be impacted very much. Even if there is going to be some slipping of sales, a 40% reduction to stock price is still very much uncalled for.
I bought at 160 and kept buying as the stock tanked in January and February. Being a long term investor, I’m looking at at least a 2-3 year hold for Apple. They have the most innovative hardware personal electronics on the planet and arguably the most innovative operating system as well.
Who knows if there will be more growth to the stock price of Apple, but I’m certain that the company will continue to innovate in the decades to come.
Enjoy the Ride.