By James Saft
Jan 24 The problem, investors, lies not in Apple
but in ourselves.
Apple's disappointing earnings report and its subsequent 10
percent-plus stock market fall on Thursday are a timely reminder
that there are a lot of idiots out there.
The issue - and your source of risk as an investor - isn't
just Apple, but rather the panting hoard of trend following
investors who drove its stock price so far above a reasonable
Apple is a great company making great products, and has an
outstanding record of creating new markets. It enjoys margins
closer to those of a software company than a consumer giant, has
more than $130 billion in cash and a historically unique
franchise, one it has been able to expand time and again.
That's a great company, but, word to investors, not one that
can be counted on to grow and profit in the future at similar
rates to the past.
Apple isn't expensive on a price/earnings basis, it is
phenomenal, and phenomena often don't sustain themselves over
That's clear from its gross margins, which fell to a still
very high 38.6 percent compared to 44.7 percent in the year-ago
quarter, and which are expected to range between 37.5 and 38.5
percent in Apple's second quarter of fiscal 2013. Those are
astounding numbers, but likely ones which, even in an
innovative, well run and healthy business, will head downwards
To justify the pricing on Apple at its peak, the company
would have had to be able to create new categories of goods
consumers were willing to pay up for, or open new markets.
That's possible, but you don't pay for that in advance.
And this isn't about the death of Steve Jobs. Steve Jobs,
great as he was, was over-rated by investors, who projected on
to him a superhuman ability to will reality to change. Jobs'
habit of refusing to accept reality did allow those around him
to do great things - more than they would have imagined - but
exceeding expectations is a lot harder when you are the biggest
and most highly regarded.
RISK IS OTHER PEOPLE
Yet investors continued to drive Apple shares up, counting
on it to bend reality to its will over and over. The saga of
Apple is actually a great lesson in a fundamental truth of
investing - most of your problems, and opportunities, come
courtesy of other investors. Though we spend most of our time
studying company fundamentals, or economics or even politics, we
are likely to make our biggest mistakes when we play the ball
and not the man.
"Much (perhaps most) of the risk in investing comes not from
companies, institutions or securities involved," famed hedge
fund manager Howard Marks of Oaktree Capital Management wrote in
his most recent client letter."It comes from the behavior of other investors."
Marks remembers the fad for the "Nifty Fifty," a group of
standout corporations whose performance was fantastic in the
late 1960s and early 70s. They were well managed, but also
overpriced. Investors, lemming like, piled in. Many of the Nifty
Fifty fell by as much as 90 percent from their in-vogue peaks.
Investors, Marks understands, set the price at which you can
get access to the stream of income a given security represents.
They can set it too high, like Apple recently, or too low, like
junk bonds in the 1970s.
The Apple phenomenon is as much about crowds and fund
manager benchmarking as it is about expensive gadgets and the
affinity of affluent older people for iPads. First Apple was an
innovation phenomenon, but then it became a financial markets
one. As it worked towards becoming the most valuable company on
the planet, fund managers saw their own performance lag the
benchmark if they sat the party out.
Performance against a benchmark drives fund flows,
compensation and job security, so doubtless many professionals
got on the bandwagon despite themselves.
So it is with Apple, so it was with subprime, so it will be
in the future.