Paul Winkler: So one of the things that was out there was about Apple. It was the idea of how Apple keeps their stock earnings coming in. Was that not interesting?
Apple Stock
Anne Sawasky: It was. So the reason I thought this was an interesting article is because if you think of any stock Apple is one of them.
PW: Name a company. Come up with a stock and Apple would be one of the first to come to people’s minds.
AS: It’s done fabulous, because if you put $10,000 in Apple in 2003, you’d be sitting on six million today and have an additional 1.6 million in dividends.
PW: It’s just mind-boggling how well that has done. But it wasn’t obvious back then.
AS: No. Because they actually almost went bankrupt at one point.
PW: I remember. It was not obvious that this was going to be the winner, but in hindsight, we see that of course it was going to be the winner.
AS: Right. And that’s hindsight bias.
Apple is a big idea disruptor, so it needs to release a new revolutionary product every few years to maintain its growth.
And that’s the problem, right now, 50% of their market share comes from iPhone sales, and iPhone sales are kind of flattening out. So in 2015, iPhone revenue grew 58%.
PW: And the revenue’s growing.
AS: However, it’s growing because they keep raising the price.
PW: Yes, it’s not because people are buying iPhones. The market is saturated, and the reason that their revenue has grown has been because they keep raising prices.
The problem with trying to raise the prices is that eventually demand will drop off and you can’t grow it anymore.
AS: Well, and here’s the thing. I just bought this nice new laptop that’s sitting in front of me, and I just bought an iPhone. Guess which one cost more?
PW: Seriously? Probably your phone.
AS: Yes.
PW: And that computer is way bigger than your phone.
AS: So the big question is how long can they keep raising the prices without it becoming where people are just not going to buy it anymore? Or they’re at least slowing it down significantly.
Investor Behavior
PW: Precisely. And what this reminded me of, Anne, is what we teach new investors about how the markets work, where returns come from, how the media tends to mislead investors, and why the investment in industry itself has been misleading in so many different ways.
We go through a bit of history of the big investment firms and how they end up misleading investors. But why would they mislead investors if that’s not good for business? A lot of times it’s good for business as far as attracting assets, not because of what you might think of though. It has to do with investor behavior.
Investor behavior is pretty much the same as behavior would be when you’re buying a car. You look at past performance of cars and you go, “Well, this car has a good track record. It’s done well.”
They’ve been happy. So maybe I’ll be happy. And then what happens with investing is you go, well, the same rules should apply. We ought to be able to buy this investment because it had great past performance and it probably will continue in the future.
So what happens is you get these things marketed in front of you, and a lot of your big cap funds, your index funds will hold as their biggest holding, Apple.
If you look back a little bit further in history, to the Dow in the 1930s, the biggest companies, the most popular, the most influential companies of their time, you wouldn’t recognize a lot of the names. You’d see names like Wright Aeronautical, Victor Talking Machine, American Sugar, and Nash Motors.
Whoa, wait a minute.
Could some of the companies we look at as being the companies end up becoming unknown in the future?
AS: Yeah. I mean, you think they’re untouchable. Nothing will ever affect them, and yet… But here’s the thing this article said too, which I thought was also interesting, because they are a tech disruptor, that they need to pull off another tech disruption.
So then the next thing they’re going to do are these virtual reality and augmented reality glasses.
Virtual Reality
PW: I knew you were going to say that. But you watch, there’s a commercial out there, and Paul does not watch a lot of TV, but he watches financial channels.
One of the commercials out there is this lady and her husband, and they’re kind of doing this virtual reality thing, and then their kids are running around and they’re moving their hands like they’re swimming.
Then what happens is then she’s in the real chair on the beach and going, “Wow, this is way better than with the goggles on.” And I think that’s exactly what’s going to happen.
Now you can say, “Well, people said that texting would be a fad.” There is a purpose behind texting that may not seem obvious. But the thing is, if I need to send a message to somebody, if I pick up a phone and I call somebody and say, “Hey, Anne,” and I call her on the phone, it’s not easy to get off a phone call.
AS: True.
PW: It’s really easy to text and then walk away and not respond for 10 minutes and have it be just a couple seconds when all I want to communicate is one short message. So as illogical as texting seems to be regarding communications, it does have a function because you don’t always want to have really elongated conversations with everyone.
AS: Should I take this personally? I’m not sure.
PW: No. But seriously though.
With virtual reality, you can go and do something virtually, but there is no way you are going to have the same effect of actually being someplace.
AS: Well, but here’s the thing, Paul, I just happened two weeks ago to go to Huntsville to the Space Center. One of their new shows or whatever you could go to was that. I’d never done it before, and I was astounded at how real it seemed.
PW: I get it, being on the spaceship would be cool and all of that stuff. But look at the backlash in society right now, and the disconnect with people and the level of depression and anxiety, the level of problems we’re facing as a society.
The Box Phenomenon
One of my clients said to me recently, “Paul, we go from box to box to box to box to box.” You go to the Kroger box, then you go to the Walgreens box, then you go back to the home box.
And he said, “I’ve been all around the world, and people are actually going out and seeing each other in public, that’s where it’s at.”
AS: I hope that’s true.
PW: Yeah. But I’m not betting on virtual reality being as big of a deal as a computer that I walk around with that used to take an entire room to fill. That is a huge innovation.
Virtual reality. Yeah, it’s cool. It’s nice. It’s kind of fun, but it’s not going to be as ubiquitous. It’s not going to be as widespread as a phone that everybody’s got to have one in their pocket.
I really could care less about virtual reality. There are a lot of people like me that are like going, do I want a phone? Yes. Do I want to be able to look up things in an instant on the phone and see what’s going on? Or do I want to be able to look up information on the fly? Yes.
That is important to most everybody. Being able to go and experience the Grand Canyon where I can actually make a trip out there and go to restaurants and go and hang out with my family and play and do whatever I want, not whatever the virtual reality company thought that I might want to do while I was out there.
Going from box to box, doing things where we’re separated from society is getting old in a big hurry.
AS: This is what Apple is thinking.
PW: I know, that’s what they’re hanging their hat on.
AS: So if that happens, they could keep up their run. If it doesn’t happen because of exactly what you’re saying, that could be a big struggle.
PW: It’s a heck of a gamble.
Index Skewing
And also if you remove, I think it was the five biggest companies in the S&P, the earnings drops. When we talk about PE ratios and how the S&P is much higher than historically normal, it’s like at 19 times earnings or something like that and when it’s normally at 16 times earnings, if you actually remove the top five holdings, it comes down to 15.
AS: It could make a big difference.
PW: What that tells you is that these bigger companies are selling for such high multiples that even though they are only five stocks out of a 500 company index, they are so high compared to the league for every dollar of earnings that they’re actually skewing the index up by that far.
These companies are not bargains on the table waiting for somebody to pick them up. There’s just so many things you have to think about as an investor.
Don’t get excited about individual stocks because that is just gambling, in my humble opinion.
AS: And that’s why I thought the article was worth talking about.
PW: Yes. It gets me worked up.
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