Given the large number of articles available online that outline
virtually every conceivable method of analyzing the quantitative
factors of Apple (
), the following aims instead to approach the subject from the
more subjective, human aspect.
"Pain and fo
olishness lead to great bliss and complete knowledge, for
Eternal Wisdom created nothing under the sun in vain."
- Kahlil Gibran
Emotions, Humanity and Investing
Andy Zaky is human if emotional. Even if he did lose what may
have been billions dollars of investors' money on AAPL in what on
the surface seems extraordinary and easy to criticize. Although
it may take a bit more intellectual creativity to imagine, it
must be concluded after careful examination that even Florian
Homm is human.
However, perhaps unknown to Zaky, in his tale of initial triumph,
failure and ultimate disaster are the answers so many are seeking
about the future of Apple. That is to say, at least in the near
term, the price movements in the shares may be subject to
extremes because of the type of buyer and seller the shares
To be fully human is to be emotional and emotions have no place
in successful investment management. To have no emotions is in a
way to lack some part of what constitutes humanity, and though an
advantage in the analysis of securities, comes at a heavy price
to the afflicted.
It seems that when the emotional development of a mind is
underdeveloped, the rational propagates, not unlike the way in
which a blind man's hearing develops beyond that of the seeing.
Somehow humans are so elastic and extraordinary that when some
aspect of their being is stifled, particularly early in life,
some other aspect compensates or maybe "over-compensates."
Ludwig Van Beethoven and Warren Buffet are notable for the
curiosities of their inter-personal relationships. It may be for
the exact reasons above. The two examples must have known
something about how trauma in early life can arrest development
in one area, while some other aspect of the mind develops beyond
the boundaries of what society can easily comprehend.
The Intellectual Value of Understanding
"Not only did these people get some spectacularly bad advice,
but they got it from someone whom I helped make famous."
- Philip Elmer-DeWitt, March 4, 2013 Fortune
Zaky and Fortune editor Philip Elmer-DeWitt deserve credit for
being contrite and honest. Is it possible that Zaky merely
represented a pre-existent element of excitement and adventure in
speculation involving shares of AAPL that had little to do with
real investment and thus accountability is easily extended from
management to investor, and perhaps editor?
"As a first generation Coptic-American, I was raised with very
deep seeded (sic) traditional notions of honor and
responsibility. For this reason, I will spend every living
breath I have to work with an effort to make our partners whole
"I am deeply sorry that I failed you. I brought dishonor to
myself and my family, and all I can do at this point is work
hard to try and make things right."
It has been said, "To err is human; to forgive, divine." But why
forgive, why not "get even," even if only through the writing of
sharp pros as many authors have done?
Without this understanding, the prospective purchaser or seller
of shares may not fully benefit from what has transpired. Of
course there could be other equally compelling reasons to
It Takes Character and Self-Control
"Any fool can criticize, condemn and complain but it takes
character and self-control to be understanding and forgiving."
- Dale Carnegie
Good can come from the tragedy suffered by those involved (which
includes Zaky and Elmer-DeWitt), if it serves as a reminder of
the dangers of stocks which attract large numbers of visceral
traders. Voluntary humility occurs when one has "one foot in the
grave." Prior to that time there is a plenitude of involuntary
openings. Exposure, attention and the promise of the sudden
creation of wealth must be a seductive and even addictive
cocktail to those whose emotions are intact, while hubris, the
less subtle companion of pride clouds the mind.
Hedge fund managers, like retail investors, are left entirely to
their own devices (or perhaps just vices). The market of retail
brokerages which caters to the latter group while far more subtle
and sophisticated than the present example, do help the majority
of their clients part with their money over time nonetheless, if
by no other means than the prompting of an astonishing number of
transactions. Perhaps what makes the current example most
poignant is the unpleasant thought that many readers of AAPL
articles could easily have been Zaky's clients or (if under the
right convergence of events) even in his shoes.
There must be many incidents similar in nature involving shares
of AAPL which have gone unreported since it is not exactly the
type of outcome one hopes to advertise.
The fact is that the percentage of managers or investors who
experience no emotions whatsoever in the execution of investment
decisions is amazingly small. For the rest, it is not unlike the
perfectly upright citizen who reads Dostoevsky great work and for
a frightful instance acknowledges the legitimacy of the question
briefly considered in his private thoughts; "
if under the right confluence of circumstances... could
Perhaps many managers and investors alike read the story of Mr.
Zaky and for an unpleasant second asked the same question which
his former investors already know the answer to.
The markets are often infected by the wild extremes of
The Short-Seller and His More Popular Cousin
"What a fool does in the end, the wise do in the beginning"
The short-seller is loathed because it is thought that he profits
when the other party to a trade loses - and he does. However,
upon more cautious consideration, he is simply selling when
others are inclined to buy and buying when others are content to
But what is possibly overlooked is that those who go "long" also
profit when others lose, yet they are viewed as virtuous,
although their activity is identical to that of the short seller,
and varies only in temporal order for it must be acknowledged
that the successful of the genus purchase shares from sellers for
whom it is not in their best interest to sell and subsequently
sell to those who shouldn't be buying. This activity is carried
out with precisely the same intentions as his close relative, the
Therefore, the question ought not to be on the ethics of dealing
in long or short positions, but rather the wisdom of the trade,
regardless of how it is executed. It should not be forgotten that
layered on top of these trades of equal intention is the
extraordinary leverage possible through the amplification of
A Knowledge of Good and Evil
"...a good reputation is a great burden and mine is already
hopelessly tarnished. I can afford to be honest..."
- Florian Homm (Rogue Financier: The Adventures of an Estranged
There is a bite missing from AAPL's logo.
Zaky was bullish on some "cross" (the website is called "Bullish
Cross"). I'm not sure what it means because specialists of
technical analysis are probably too intelligent for the more
simple-minded value-oriented managers to figure out their code.
But there is at least one hypothesis; for some 2,000 years it has
generally been recognized that a cross usually is a symbol,
amongst other things, of sacrifice, truth and redemption. It has
been said that with faith this symbol can undo the lethal effects
of a bite from a certain forbidden fruit that had something to do
with the knowledge of good and evil - a commonality in every
It is impossible to forecast the future price of AAPL, but much
can be gained of far greater value. The truth rarely emerges on
Wall Street and when it does it is worth listening to, no matter
how unlikely the source. The reality about AAPL is no matter how
far the present value exceeds the quoted price the shares remain
a favorite of speculators, who are the primary operators in the
shares. Since speculation is irrational there is no way to
quantify its limits.
There have been many financial models to compute the supposed
future value of AAPL, but none have offered to measure the
effects of irrational behavior on the share price so well as that
provided in the confessions of Zaky and Elmer-DeWitt.
Every Action Has a Reaction
At current prices (approximately $425), the shares appear to
represent just the sort of investment opportunity that a shrewd
value investor such as Buffett or Munger would find attractive.
However, Buffett and Munger are not good examples for the average
investor to follow since they have some ten of billions of
dollars to put to work.
It is not a stretch to imagine that the overwhelming majority of
readers of articles on the value of AAPL have somewhat fewer
zeros to worry about on their brokerage account statements. Given
this, the question, "
What would Buffett or Munger find attractive?
" is probably not the right question, particularly since their
stated timeline is "forever," a distance in time considerably
greater than the average investors.
Needless to say, the 40% drop in price did not go unnoticed. It
looks as if there are a few different eventualities of this
1. Value investors (a categorical minority) will notice, and
finding value may buy.
2. Speculators (a categorical majority) will notice and fearing a
more prolific exit may yet sell.
3. A great many retail investors who would have passively owned
the shares but do not regard or understand fundamentals will
decide it is better to "
keep the diminished gains, despite the recent discount
" and sell - i.e. acquiescence or capitulation.
4. A large number of more recent owners, the greatest percentage
of which will also neither understand or care about the
fundamentals will have negative feelings associated with the
shares, perhaps for the remainder of their investing careers.
5. Institutional managers may feel a need to do what their peers
are doing, and having basically the same feelings as the average
retail investor may become uncomfortable with a position which
places them in opposition to [a perceived] majority.
6. Some may reason that since the shares had increased in value
for so many years, that six months does not seem like a
significant amount of time for a correction.
The first group may buy on the news of such a substantial
discount from prices only six months ago, but the later five,
preferring the comfort of the crowd and unfamiliar with the
comfort a thorough understanding of the financials can provide,
are just as likely to keep selling or otherwise avoid the shares.
In such a circumstance it does not pay to be in the minority.
Not withstanding this, many who have suffered losses in the last
six months, and still own the shares may want to know what the
good news is.
There is no shortage of impressive and complex spreadsheets
available in the never ending stream of commentary available
online attesting to all of the fantastic methods available for
discerning the "true" future value (or in some cases, price) of
shares of AAPL. Providing more analysis on what must be the most
analyzed company in history might be over-kill and given the
human bent above, it seems that the following simple examples
will suffice for the present exercise.
Extremely Well Capitalized
It's been said before - AAPL is extremely well capitalized.
However, it is a bit more fun if the analyst considers moving
long-term investments to short-term to get a handle on NCAV (net
current asset values). Why? AAPL can borrow at probably next to
nothing against these assets if greater liquidity were really
needed - this provides a 25% NCAV value at approximately $425 per
share (or about $107.45 per share - this figure does not utilize
the stricter "Graham" approach) which is extraordinary for a
company of AAPL's size. However, it is not on the whole unusual
for a publicly listed company.
After a four-year bull run, a focus on the balance sheet may be
of uncommon importance, and there are other smaller companies
available with higher NCAV values, and equal growth. The size of
the company in this case is extremely relevant as smaller
concerns, in general, have the ability to continue higher rates
of growth (given the difficulties inherent in such economies of
Growth in Per Share Book Value Impressive
The ability to grown per share book value in aggregate by 48%
over the last six years is extraordinary. The growth in equity
overall was even more impressive at 51% (although this also
reveals the dilution that took place for longer term owners).
Very few companies can boast either metric, and even if there are
no blockbuster products in the pipeline, AAPL may be able to
continue this performance for years to come if cash is allocated
to significant repurchases and the price remains low or declines
Fig. 1 - AAPL Growth in Per Share Book Value
Growth in Per Share Book Value
|12 month forecast
|Avg. w/ dividend:
Over 10 years the growth in per share book value has been
6,054.18%, but price has accelerated at a somewhat faster pace
since 2009 as illustrated below:
An Astonishing Company Before an Unexpected
Can technology meant for the masses be turned into a truly
enduring brand? Few companies in history have enjoyed the cult
following that AAPL has, but will it last? Nobody knows, but if
ever there was a company that could create the "Ferrari" of
technology (if that's not a contradiction), that is to say
something as admired for its quality as its ability, then AAPL
must be it. Yet Ferrari is meant for the few, and in their
limited supply appeal to the majority as the "exclusive" content
How can this be transferred to the economies of scale which AAPL
now faces? Microsoft and Google have extremely strong brands, but
never have had quite the cult following of AAPL. These companies
appear to build "need" more into their products, but AAPL has
built desire - and desire is more transient and emotive than
"need." MSFT for example has greater operating margins than AAPL,
and yet over the last year the share price has declined some
12.88% and declined some 4.82% in the last five years while
shares of AAPL have increased by some 243.83% (after the recent
decline). A key difference may be that MSFT, although often
needed, has spurred little desire for its products.
The Next Blockbuster Product
The second half of 2013 may usher in the arrival of the next
blockbuster product for AAPL, but if that is the driver of an
investment decision there is no reason to wait until the
announcement, because the current product is likely to be a
yet-to-be-revealed blockbuster. The iPad Mini is sort of like a
new luxury car body style. At first it doesn't look quite right,
perhaps even wrong, but then one day the eye sees what the
designer meant and realizes that all along it was the viewer who
was wrong and not vice versa. Just such an experience may have
been common with the new Mini. Since its announcement, the idea
did not seem good and the product wrong - indeed "lacking." But
the iPad Mini is not the wrong size. There is nothing wrong about
it. The traditional iPad is sized wrong. Conversion can be nearly
instantaneous... Jobs, who had not liked the idea either, despite
his genius, was wrong.
The idea of a iWatch seems equally awkward at first, but AAPL may
prove to be right again, if only one will imagine the fantastic
ways in which AAPL may change the activities of everyday life
with such a device, and a scheme which promises margins far in
excess of the more commonly contemplated iTV.
There is no clear advice that can be given on the shares of AAPL
given its extraordinary position in history and the variety of
intentions of the investing public (especially those outlined
above). However, a few timeless principles of investment may be
useful to more passive investors considering their position or
prospective position in the company;
1. Long-term horizons are always better when a great company is
2. Buying securities when the price is demonstrably below real
value (an approximation will do), usually provides better than
3. If patience, focus and discipline are not "hard-wired" into
decision making, avoid trading entirely.
For an enterprising value oriented investor on the other hand, it
is hard to see how shares of AAPL will provide extraordinary
gains over some of the secondary and smaller issues available
from time to time in the market, and although a wonderful company
with marvelous products, as an investment, unless there are 10
digits on your brokerage statement which need to be put to work,
there are more aggressive bargains available often enough. AAPL
is cheap, but it's not "screaming" cheap.
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