Sure, markets tend to overshoot on both the upside (bubbles) and downside (panics). You can plot those actions as part of the fear/greed continuum.
At this point I can't completely endorse the idea of ignoring these emotional market reactions, and investing over ten year horizons. Speaking for myself (and many others too), in the Spring of this year I found my investments to be worth less than they were in the mid-1990s. Not only had I lost all my paper gains during an over ten year timespan, I'd also lost all of the contributions I'd made to my IRA and SEP-IRA for that period, which were substantial. I won't even try to describe how that feels -- I'm sure a lot of people already know. To make matter worse, this was the second market panic I'd experienced in ten years.
No, I didn't panic. I didn't sell anything, probably because I was too shell-shocked. In fact I bought, a little. The markets have since recovered some of their losses, though hardly all. But the point is, should I trust the markets to treat me well over the next ten years? Fool me once, fool me twice -- fool me three times?
As for Apple, I think they are a very good prospect for the next couple of years, but I know their success depends on pulling rabbits out of their hat on a regular basis. How much longer can they realistically be expected to do that? So beyond the next two, three years I don't know. I certainly would not try to predict where they, or the stock price, will be in five or ten years.
I don't buy individual stocks or bonds, but after 30 years of investing, if I had to choose one for the long term, i.e., make a bet 10 or more years out, even granting the succession issues looming at some point, and the fluidity of evolving technology markets, I would probably choose AAPL despite its inherent volatility. They're quite the outfit, own and/or master an iconic stable of foundational technologies, expertise, creativity, good consumer will, unprecedented buzz and actual business sense, and will reflect the brilliant team that resurrected them for a good long while.
They could lose their way, could lose their nimbleness in their sheer growing size, get mired like MS in an increasingly growing base of legacy devices and code, etc. But I wouldn't bet agin 'em when taken head to head with any other company I can think of.
There is another thing in Apple's favor, which is almost old fashioned: They are sitting on a mountain of cash. I chuckle every time some disciple of the current religion demands that Apple "put it to work," because they have forgotten what cash buys you that nothing else can: stability. Certainty. That's why pensions were cash (until they were "put to work" and all but vanished). Apple could faceplant, badly, and take a full year to recover, and when they did they'd be sitting on an even bigger mountain of cash. It assures that the operation isn't brittle, that they have a concrete and redundantly massive insurance against risk. That, in turn, means that they can be utterly fearless in taking risks. They can throw $4M at renovating a 60 year old subway station in order to maintain their brand image at a single store. They simply do not answer to the risks and vagaries of the market, or of R&D, or of bold design.
Look at how long Microsoft was able to coast on their cash supply. They are a far less efficient and well-directed company than Apple is, and they were able to weather a huge, failed (but necessary) release and follow it up successfully eight years after XP (which itself caused a great deal of pain upon its release).
In an era when everyone else was acquiring and leveraging and investing aggressively, Apple was tending Fred Anderson's meticulously built "cash machine" and eliminating all but a small amount of tactical debt. As a result, they have years' worth of insurance against failure. As a result, they can take risks that no other company would even consider taking. As a result, they are wildly successful and growing.
A lot of companies could do well to learn that lesson. But they'd have to learn design first, and apparently that's even harder than retreating from high finance.
Chuckle all you like, but you're arguing against the bedrock principle of capitalism, which is (and it seems ridiculous even to have to mention it), the investment of capital for the purpose of making more money. Apple doesn't need $30 billion to spend $4 million. This must be "new math" at work. It sure doesn't compute for me.
Also, Microsoft hasn't "coasted" on their cash reserves, since they have never stopping making money. A company has to start losing money before they're going to need to rely on their cash reserves, which is surely a thing you never want to see. The goal of capitalism is, has been, and will continue to be, investing capital to increase earnings. If a company accumulates cash which it cannot use for that purpose, then they are, by definition, using it inefficiently. You might have noticed that Microsoft's stock price hasn't grown much at all over the last ten years or so, which is a reflection of their stagnant earnings growth rate. Their cash mountain does not help them here. In fact its existence only serves to point out that they have failed to use it in the way capitalism demands, and how capitalism defines success.
Chuckle all you like, but you're arguing against the bedrock principle of capitalism, which is (and it seems ridiculous even to have to mention it), the investment of capital for the purpose of making more money. Apple doesn't need $30 billion to spend $4 million. This must be "new math" at work. It sure doesn't compute for me.
Maybe I am. What is money, after all, but a means? It really isn't anything, by itself. It's potential. (This is even more true if you broaden the term from "money" to "capital.") Apple is using money to do what it really wants to do, which is make really great stuff. Of course, the executives are making lots and lots of money doing it. Apple is not a commune by any stretch of the imagination. But, like many of the most innovative and dearly loved companies, they are focused on producing something great. Unlike many of those companies, they've figured out how to make a lot of money producing something great. Unlike many of those companies, they have been excellent stewards of the money they've made, which allows them to take risks, which allows them to focus on producing something great.
If anything, they are less a critique of capitalism than a sort of capitalist Zen koan: The successful capitalist need not focus on the accumulation of capital. Or, another way to look at it (which would include, say, Warren Buffett) is that in the long term, the most successful capitalists are patient and conservative.
Quote:
Originally Posted by Dr Millmoss
Also, Microsoft hasn't "coasted" on their cash reserves, since they have never stopping making money. A company has to start losing money before they're going to need to rely on their cash reserves, which is surely a thing you never want to see.
They never stopped making money, but they are indisputably weakened from ten years ago.
Quote:
Originally Posted by Dr Millmoss
The goal of capitalism is, has been, and will continue to be, investing capital to increase earnings. If a company accumulates cash which it cannot use for that purpose, then they are, by definition, using it inefficiently.
Oh, I see. You're assuming that by "cash" I mean that there is a warehouse full of mattresses outside of Cupertino, each with a pile of physical dollar bills stuffed in it. "Cash"--Apple's shorthand, not mine--refers to highly liquid capital. It's invested, but conservatively. That's how they've grown it. They invest, get a real but modest return, and invest the return. Mix in some profits when you've had a good quarter. Lather, rinse, repeat over the course of a decade, and you have built a few tens of millions into a multi-billion dollar "cash machine"--Fred Anderson's term. With "no debt"--again, Apple-speak for no long-term debt, as they regularly take short-term loans when expedient--there is no drain on their reserves, and so the accumulation of liquid capital is close to maximally efficient. As the old capitalist adage goes, it takes money to make money.
But they are also putting the money to use. It stabilizes both their stock price (on an upward slope, because the money is making money), by cushioning their valuation, and it stabilizes their company by cushioning against risk. What else should it do? I find it nearly impossible to imagine how it could have been better used, given that the rise of Apple as a powerhouse directly correlates to the performance of their "cash machine" over the last decade.
Quote:
Originally Posted by Dr Millmoss
You might have noticed that Microsoft's stock price hasn't grown much at all over the last ten years or so, which is a reflection of their stagnant earnings growth rate. Their cash mountain does not help them here. In fact its existence only serves to point out that they have failed to use it in the way capitalism demands, and how capitalism defines success.
It simply means that Microsoft sat on theirs, but Apple hasn't done that and won't. It's still growing. Also, Microsoft spent most of the last ten years sitting on their laurels, or twiddling their thumbs, or infighting, or tilting at windmills--something other than shipping great stuff. Apple hasn't done that either, and as long as they don't they should be safe from stagnation.
The best case is that Apple never needs to tap their cash pile to make up for failure. But as far as anyone evaluating the company is concerned, the cash pile is a very generous insurance policy against tactical failure, and as good a policy as one can have against strategic failure, which makes them a safe play for any partners or investors or lenders despite the fact that their product line and their approach to developing products is anything but--which allows them to make things that people really want to buy, which means that the cash pile gets even bigger. Etcetera.
I can answer your entire essay by saying that the model for Apple is not, nor should it ever be, Microsoft. Not in any way, shape or form. The problem Microsoft has is not sitting on their cash hoard, but not knowing how to reinvest it in ways which grow their business. This problem is becoming chronic in their case, which is why their stock stagnates. Unless Apple wants to become a bank, investing their cash "conservatively," or in any way that does not grow the business they are actually in, is nonproductive. It violates Rule 1 of capitalism, which is not to accumulate capital but to reinvest capital. What they are doing now is far more of the former than the latter. This is troubling, to those of us who understand how difficult it will be for them to keep up their present growth rate. Accumulating cash certainly is not how.
Comments
At this point I can't completely endorse the idea of ignoring these emotional market reactions, and investing over ten year horizons. Speaking for myself (and many others too), in the Spring of this year I found my investments to be worth less than they were in the mid-1990s. Not only had I lost all my paper gains during an over ten year timespan, I'd also lost all of the contributions I'd made to my IRA and SEP-IRA for that period, which were substantial. I won't even try to describe how that feels -- I'm sure a lot of people already know. To make matter worse, this was the second market panic I'd experienced in ten years.
No, I didn't panic. I didn't sell anything, probably because I was too shell-shocked. In fact I bought, a little. The markets have since recovered some of their losses, though hardly all. But the point is, should I trust the markets to treat me well over the next ten years? Fool me once, fool me twice -- fool me three times?
As for Apple, I think they are a very good prospect for the next couple of years, but I know their success depends on pulling rabbits out of their hat on a regular basis. How much longer can they realistically be expected to do that? So beyond the next two, three years I don't know. I certainly would not try to predict where they, or the stock price, will be in five or ten years.
I don't buy individual stocks or bonds, but after 30 years of investing, if I had to choose one for the long term, i.e., make a bet 10 or more years out, even granting the succession issues looming at some point, and the fluidity of evolving technology markets, I would probably choose AAPL despite its inherent volatility. They're quite the outfit, own and/or master an iconic stable of foundational technologies, expertise, creativity, good consumer will, unprecedented buzz and actual business sense, and will reflect the brilliant team that resurrected them for a good long while.
They could lose their way, could lose their nimbleness in their sheer growing size, get mired like MS in an increasingly growing base of legacy devices and code, etc. But I wouldn't bet agin 'em when taken head to head with any other company I can think of.
There is another thing in Apple's favor, which is almost old fashioned: They are sitting on a mountain of cash. I chuckle every time some disciple of the current religion demands that Apple "put it to work," because they have forgotten what cash buys you that nothing else can: stability. Certainty. That's why pensions were cash (until they were "put to work" and all but vanished). Apple could faceplant, badly, and take a full year to recover, and when they did they'd be sitting on an even bigger mountain of cash. It assures that the operation isn't brittle, that they have a concrete and redundantly massive insurance against risk. That, in turn, means that they can be utterly fearless in taking risks. They can throw $4M at renovating a 60 year old subway station in order to maintain their brand image at a single store. They simply do not answer to the risks and vagaries of the market, or of R&D, or of bold design.
Look at how long Microsoft was able to coast on their cash supply. They are a far less efficient and well-directed company than Apple is, and they were able to weather a huge, failed (but necessary) release and follow it up successfully eight years after XP (which itself caused a great deal of pain upon its release).
In an era when everyone else was acquiring and leveraging and investing aggressively, Apple was tending Fred Anderson's meticulously built "cash machine" and eliminating all but a small amount of tactical debt. As a result, they have years' worth of insurance against failure. As a result, they can take risks that no other company would even consider taking. As a result, they are wildly successful and growing.
A lot of companies could do well to learn that lesson. But they'd have to learn design first, and apparently that's even harder than retreating from high finance.
Also, Microsoft hasn't "coasted" on their cash reserves, since they have never stopping making money. A company has to start losing money before they're going to need to rely on their cash reserves, which is surely a thing you never want to see. The goal of capitalism is, has been, and will continue to be, investing capital to increase earnings. If a company accumulates cash which it cannot use for that purpose, then they are, by definition, using it inefficiently. You might have noticed that Microsoft's stock price hasn't grown much at all over the last ten years or so, which is a reflection of their stagnant earnings growth rate. Their cash mountain does not help them here. In fact its existence only serves to point out that they have failed to use it in the way capitalism demands, and how capitalism defines success.
Please, do not wish this on Apple.
Chuckle all you like, but you're arguing against the bedrock principle of capitalism, which is (and it seems ridiculous even to have to mention it), the investment of capital for the purpose of making more money. Apple doesn't need $30 billion to spend $4 million. This must be "new math" at work. It sure doesn't compute for me.
Maybe I am. What is money, after all, but a means? It really isn't anything, by itself. It's potential. (This is even more true if you broaden the term from "money" to "capital.") Apple is using money to do what it really wants to do, which is make really great stuff. Of course, the executives are making lots and lots of money doing it. Apple is not a commune by any stretch of the imagination. But, like many of the most innovative and dearly loved companies, they are focused on producing something great. Unlike many of those companies, they've figured out how to make a lot of money producing something great. Unlike many of those companies, they have been excellent stewards of the money they've made, which allows them to take risks, which allows them to focus on producing something great.
If anything, they are less a critique of capitalism than a sort of capitalist Zen koan: The successful capitalist need not focus on the accumulation of capital. Or, another way to look at it (which would include, say, Warren Buffett) is that in the long term, the most successful capitalists are patient and conservative.
Also, Microsoft hasn't "coasted" on their cash reserves, since they have never stopping making money. A company has to start losing money before they're going to need to rely on their cash reserves, which is surely a thing you never want to see.
They never stopped making money, but they are indisputably weakened from ten years ago.
The goal of capitalism is, has been, and will continue to be, investing capital to increase earnings. If a company accumulates cash which it cannot use for that purpose, then they are, by definition, using it inefficiently.
Oh, I see. You're assuming that by "cash" I mean that there is a warehouse full of mattresses outside of Cupertino, each with a pile of physical dollar bills stuffed in it. "Cash"--Apple's shorthand, not mine--refers to highly liquid capital. It's invested, but conservatively. That's how they've grown it. They invest, get a real but modest return, and invest the return. Mix in some profits when you've had a good quarter. Lather, rinse, repeat over the course of a decade, and you have built a few tens of millions into a multi-billion dollar "cash machine"--Fred Anderson's term. With "no debt"--again, Apple-speak for no long-term debt, as they regularly take short-term loans when expedient--there is no drain on their reserves, and so the accumulation of liquid capital is close to maximally efficient. As the old capitalist adage goes, it takes money to make money.
But they are also putting the money to use. It stabilizes both their stock price (on an upward slope, because the money is making money), by cushioning their valuation, and it stabilizes their company by cushioning against risk. What else should it do? I find it nearly impossible to imagine how it could have been better used, given that the rise of Apple as a powerhouse directly correlates to the performance of their "cash machine" over the last decade.
You might have noticed that Microsoft's stock price hasn't grown much at all over the last ten years or so, which is a reflection of their stagnant earnings growth rate. Their cash mountain does not help them here. In fact its existence only serves to point out that they have failed to use it in the way capitalism demands, and how capitalism defines success.
It simply means that Microsoft sat on theirs, but Apple hasn't done that and won't. It's still growing. Also, Microsoft spent most of the last ten years sitting on their laurels, or twiddling their thumbs, or infighting, or tilting at windmills--something other than shipping great stuff. Apple hasn't done that either, and as long as they don't they should be safe from stagnation.
The best case is that Apple never needs to tap their cash pile to make up for failure. But as far as anyone evaluating the company is concerned, the cash pile is a very generous insurance policy against tactical failure, and as good a policy as one can have against strategic failure, which makes them a safe play for any partners or investors or lenders despite the fact that their product line and their approach to developing products is anything but--which allows them to make things that people really want to buy, which means that the cash pile gets even bigger. Etcetera.