In May 2016, I expressed some very contrarian arguments about why I decided to sell my entire position in Apple Inc. Of course, they weren’t the least bit contrarian at the time because many others were expressing them. The stock price had fallen around 25% from its all-time high over the course of a year, fueled mostly by worries about how a large percentage of its revenue came entirely from the iPhone – and still does – which also occupies a small percentage of global smartphone sales and, as some would argue, smaller with time.
I think it would be interesting to follow up on that post, given the developments in Apple’s story over the past year. I’ll start with addressing my credibility as an investor after having the audacity to sell my shares in the world’s largest company, consider Apple’s prospects over the next several years, then discuss why it’s surge in price in the past year isn’t all that it’s cracked up to be.
Who do you trust?
Since the day I published that post about 14 months ago, Apple’s stock price has rocketed up nearly 50%. At its peak back in May, it had risen over 60% in one year. Should I eat crow? Admit that my arguments were flawed? Looking back on that post, actually my thesis hasn’t changed a single bit. Nor has the fact that probably every computer and portable device that I buy from now until the day I die – or it dies – will be made by Apple, as has been the case for the past twelve years.
Before I ask another, very pointed question for you to consider, I like to take the approach of being totally honest and transparent, exactly the way in which The Motley Fool displays to subscribers the buy price of every position they’ve ever recommended, even after some of them tank, and the sell price of every one they’ve ever sold that have since gone up.
So here’s the question: am I stupid? More specifically, in light of what I’ve disclosed since my sale of Apple, are any advice or ideas I have posted on this blog even worth considering? What I didn’t disclose last year is that I sold my Apple position in order to buy Shopify (SHOP) which has risen considerably more than Apple’s share price since then. I could have invested in something that did not fare as well as Apple, in which case my advice might certainly be considered not worth following.
But back to the original question. Whether or not I’m stupid depends entirely upon your mindset. If you’re looking for security – and frankly, boredom – then I’m a complete idiot. As for you, by all means buy a position in Apple and watch the stock price go up but likely more slowly from now on. Sit back and watch as Apple relies on recurring revenue and tweaks to their system rather than the blockbuster innovations of the Steve Jobs era that have not happened since and have no signs of happening. It’s a safe bet, or at least safer than most other companies in the technology space. Hey, you even get a bit of a dividend.
But if you’re looking to double your money or more any time within the next decade, then absolutely look elsewhere. If you have the mindset of wanting a faster return on your investments then there are many and far better options. For example, Shopify’s story is only getting started despite its recent run-up in price. In ten years it has the potential to be many times higher than what Apple’s return will be, not just over the past year. According to one analyst in a recent interview, Apple’s market cap is simply too enormous to have any hope of doubling from where it is now (I did not note the source at the time). Regardless, the days of multiplying your return on Apple, whether two times or a hundred times (if you bought Apple in the beginning and somehow still own it), are effectively over.
The days of multiplying your return on Apple, whether two times or a hundred times (since the beginning), are effectively over.
Here’s another thing that many people might not realize: the main reason for the surge in Apple’s stock price in the past year has resulted from what has been referred to as the “Buffett Effect”. Literally only days after my post last May, Warren Buffett bought his first stake in Apple which sent up its price a few percent. In fact, it could be argued that the run-up since then can almost by entirely attributed to the Oracle of Omaha’s interest in this company. And it seems as though once investors catch wind of Buffett buying into a certain company, the trend is for several of them to follow like sheep without question.
Buffett’s reasons revolve around the “stickiness” of the Apple ecosystem, according to a term he used during one interview, how people who own one Apple product tend to buy more and then find it hard to get out once they’re in. This has led to recurring revenue from hardware and app and music sales – tons of cash flow, in fact – and the resulting towering mountain of money upon which Apple Inc. currently sits (and seems to do little more with).
But again, whether or not you should invest in Apple depends entirely upon your mindset. If time is a factor and you want a faster return on your money, although the reasons to own Apple are very compelling to somebody looking for more safety and stability – recurring revenue versus the bygone days of blockbuster innovation and growth – it won’t happen as quickly as with other players in the tech space, big or small.
As for the credibility of the advice of investors like me who shared why I got out of Apple just before the Buffett Effect took place, I was merely echoing concerns that have somehow magically disappeared since then. It’s funny how something as simple – and totally superficial – as a surge in stock price will sweep lingering concerns back under the rug. Not only does 63% of Apple’s current revenue depend entirely upon one product line, but intense competition in China explains Apple’s recent, seemingly desperate attempts to penetrate the world’s second-largest market in India. It will likely pan out at least reasonably well for Apple in the medium term – they will be very calculated in how they approach this, as usual – but then where do they go from there?
It’s funny how something as simple – and totally superficial – as a surge in stock price will sweep lingering concerns back under the rug.
The Final Word
Do I want Apple to fail? As a devoted user of their products, absolutely not! But as an investor who hopes to increase in savvy and wisdom, I like to look past any hype and to not ignore concerns that the smoke-and-mirrors effect of a surging stock price seems to hide for a time.
What if Apple doesn’t double or even return 60% per year, returning only, say, 10% to 20% on average per year for another decade (as the Buffett Effect eventually wears off)? Not many investments of any kind have even that good of a return. But even this is Apple’s absolute best-case scenario if they remain on their current safe, non-innovative path.
I like to look past any hype and to not ignore concerns that the smoke-and-mirrors effect of a surging stock price seems to hide for a time.
All this considered, I don’t feel the least bit stupid for dumping my entire position in Apple Inc. stock in May 2016, even if my return in another stock since then had not multiplied. I’m simply not intrigued nor excited about their future like I was while Steve Jobs was still alive and I believe that I echo the sentiment of more and more Apple-watchers worldwide since his death. A person has to learn, not just in investing but in life, to stick with convictions even when they might be unpopular or even absurd or, worse yet, when they contradict the convictions of someone like the revered – yet entirely human – Oracle of Omaha.