With the above in mind, you also need to be able to follow, closely, your investments. To follow a business, you need to understand the business and its success factors, its marketplace, its competition, how it compares to that competition, what technological changes are on the horizon that might impact the business, the legal, regulatory, and political landscape associated with the business, etc. Even so-called professional analysts, because they attempt to cover multiple, often many, businesses, nearly always get it wrong on a large and well followed and reported-on business like Apple. How many people can follow even three companies, in three different industries, with different metrics as measures of success? How many even know the metrics of success for even one company in which they take a position? Stock picking, itself, is for the vast majority of those who participate, casino betting. Diversification, in this context, is appropriate since you would want to limit exposure to any individual bet.
With the definition of investment in hand, it's a matter of screening for companies that are structurally sound; strong earnings at a relatively low multiple, solid balance sheet with net tangible assets not far below total stockholder equity (i.e., little of the company's assets represented by the Goodwill and Intangible Assets line items), and plenty of cash/cash equivalents to carry the company through downturns or changes in the direction of the business.
Also look for a history of organic growth versus acquisition-based growth, a strong brand and competitive position, no significant impediments to growth, no significant risks such as lawsuits or potential for lawsuits (think medical device manufacturers and the hip implant lawsuits that have cost them billions), and technological leadership (which can be associated with the company's product technology or associated with process technology or even marketing technology; you want some significant technology lead that gives the company a clear edge).
There are other things to look for, some that depend upon the particular business. I look for a business that excels in whatever metrics are most critical for success and growth in the industry/segment in which the business participates. And it should be comprehensible to a non-expert in the field; buy what you know.
The temperament and discipline to stay the course and not get thrashed moving from one stock to another can be bolstered by having strong confidence in the businesses in which you place your investable funds, so knowing the workings of each business and its competitive environment is key. And that leads to the question... how much can you know about 10 businesses versus two or three at-a-time? The answer is obvious and points to the fact that you should consider concentrating your holdings only when you know a business cold, and diversify your holdings when you don’t. And leave speculation to those who know how to win at that game.
Analysts and Arm-Chair Analysts each either try to defend or condemn Apple's BuyBacks. And everybody tries to understand them and their reasons and ramifications.
As an ex-accountant & internal financial analyst, I can say that none of them know what they're talking about. Yes, they get all the financial statements with all the numbers. But the real knowledge is what is behind those financial statements as explained to executives in internal meetings and then expanded out into internal long-term strategy meetings -- all stuff that neither we nor the external analysts will ever know about.
But, Apple is not the only company doing it. And what one analyst said is relavent: One of the major reasons the stock market has been so high (over the past several years) is simply due to its huge amount of stock buybacks. So, the question then is: What would Apple's stock be valued at -- as well as the overall stock market -- if those enormous buybacks had never happened? Or, what will happen when they stop? And that may happen sooner rather than later as interest rates rise making debt more expensive.
Apple remains undervalued, in part, because of a lack of appreciation that it’s stock buybacks are NOT a gimmick. I can’t speak for any other company. The reality is that the buybacks are strictly based on cash purchases. Yes, debt was acquired during the years Apple’s foreign cash remained in limbo. But that debt was always covered by cash. Indeed, the move to “cash neutral” means that there will still be cash available equal to the debt even after that point is reached somewhere between 3 and 5 years from now.
The cash Apple spends on buybacks has the effect of increasing each remaining share’s percentage ownership of Apple the company. Thus, if you had bought a share just before the buybacks commenced, your share would represent ownership of well over 35% more Apple. When (not if) Apple reduces the share count to half of what it was before buybacks commenced, each share will equal exactly twice the ownership it did before. Thus Apple’s buybacks are NOT a gimmick, but a legitimate way of returning value to the investor, with the added benefit of deferring taxes until the share is actually sold (unlike dividends outside of an IRA).
The value of AAPL absent these buybacks, IMHO, would be substantially reduced. The fiction would continue that Apple is NOT, as Jim Cramer recently put it, an incredibly successful, rich, and international razor-and-razorblade company, but only a “manufacturer” with ultra-high margins that were bound to be commoditized, and that it’s huge cash surplus was worth nothing vis-a-vis it’s future value and should not be considered when weighing it’s P/E against other companies.
The Awakening is finally happening, in part because Apple now has access to it’s cash worldwide, in part because it has clearly returned incredible value to it’s investors via the buybacks it has already made, and in part because people like Warren Buffett are finally “getting” Apple and realizing what an amazing value it is in terms of future valuation.
You can call me an “arm chair analyst”, but I’ve put my money where my mouth is, that is, by investing heavily in Apple for the long haul. I’ve paid my dues over the decades I’ve owned and watched Apple and AAPL. And I’m in very good company, with the likes of Horace Deidu of Asymco very much in my camp.
So I’ll stack my personal analysis up against your so-called “expertise” any day of the week.
"Expertise"? I never claimed that.
What I did claim was experience preparing and presenting financial statements -- and the stuff that caused them to be what they were TO MANAGEMENT. Yes, everybody sees the financial statements. But only management knows what caused them to be what they were and only management is privy to the strategies and reasoning going forward.
So do I know why Apple is doing this? No.
Do the analysts know? No.
Do you? Not unless you're part of Apple management
And that has nothing to do with Apple per se. It's equally true of every company.
And too, I am neither saying that what Apple is doing is good or bad. We just have to trust them. Or not. That's a personal choice or, more correctly, a personal gamble.
When there exist clear benefits to performing some action, as Sacto Joe and I have both detailed in previous messages, and those benefits are generic to any context, in this case generic to any business buying back shares while they are undervalued, you need not know or guess about other, potentially hidden or non obvious motivations. Occam’s razor.
A very honest questions to you since you have taught yourself far more than I know about it: How does Apple's appreciating stock price help Apple themselves?
I don't see any monetary benefit to the company themselves. They aren't issuing any new stock to fund business expansion or development, and the share of repurchased stock has no monetary value going forward since it's retired. The only potential value I see is for an investor (and has that even been shown effective in this case yet?) and not Apple the corporation, but it's certainly possible there's parts of it I don't understand.
An appreciating stock, as DED mentioned, can be an incentive used in the onboarding and retention of valuable potential and existing employees through issuance of stock options with future vesting dates.
Ah, keeping the executive team happy. Well that would be a good reason.
Analysts and Arm-Chair Analysts each either try to defend or condemn Apple's BuyBacks. And everybody tries to understand them and their reasons and ramifications.
As an ex-accountant & internal financial analyst, I can say that none of them know what they're talking about. Yes, they get all the financial statements with all the numbers. But the real knowledge is what is behind those financial statements as explained to executives in internal meetings and then expanded out into internal long-term strategy meetings -- all stuff that neither we nor the external analysts will ever know about.
But, Apple is not the only company doing it. And what one analyst said is relavent: One of the major reasons the stock market has been so high (over the past several years) is simply due to its huge amount of stock buybacks. So, the question then is: What would Apple's stock be valued at -- as well as the overall stock market -- if those enormous buybacks had never happened? Or, what will happen when they stop? And that may happen sooner rather than later as interest rates rise making debt more expensive.
Apple remains undervalued, in part, because of a lack of appreciation that it’s stock buybacks are NOT a gimmick. I can’t speak for any other company. The reality is that the buybacks are strictly based on cash purchases. Yes, debt was acquired during the years Apple’s foreign cash remained in limbo. But that debt was always covered by cash. Indeed, the move to “cash neutral” means that there will still be cash available equal to the debt even after that point is reached somewhere between 3 and 5 years from now.
The cash Apple spends on buybacks has the effect of increasing each remaining share’s percentage ownership of Apple the company. Thus, if you had bought a share just before the buybacks commenced, your share would represent ownership of well over 35% more Apple. When (not if) Apple reduces the share count to half of what it was before buybacks commenced, each share will equal exactly twice the ownership it did before. Thus Apple’s buybacks are NOT a gimmick, but a legitimate way of returning value to the investor, with the added benefit of deferring taxes until the share is actually sold (unlike dividends outside of an IRA).
The value of AAPL absent these buybacks, IMHO, would be substantially reduced. The fiction would continue that Apple is NOT, as Jim Cramer recently put it, an incredibly successful, rich, and international razor-and-razorblade company, but only a “manufacturer” with ultra-high margins that were bound to be commoditized, and that it’s huge cash surplus was worth nothing vis-a-vis it’s future value and should not be considered when weighing it’s P/E against other companies.
The Awakening is finally happening, in part because Apple now has access to it’s cash worldwide, in part because it has clearly returned incredible value to it’s investors via the buybacks it has already made, and in part because people like Warren Buffett are finally “getting” Apple and realizing what an amazing value it is in terms of future valuation.
You can call me an “arm chair analyst”, but I’ve put my money where my mouth is, that is, by investing heavily in Apple for the long haul. I’ve paid my dues over the decades I’ve owned and watched Apple and AAPL. And I’m in very good company, with the likes of Horace Deidu of Asymco very much in my camp.
So I’ll stack my personal analysis up against your so-called “expertise” any day of the week.
"Expertise"? I never claimed that.
What I did claim was experience preparing and presenting financial statements -- and the stuff that caused them to be what they were TO MANAGEMENT. Yes, everybody sees the financial statements. But only management knows what caused them to be what they were and only management is privy to the strategies and reasoning going forward.
So do I know why Apple is doing this? No.
Do the analysts know? No.
Do you? Not unless you're part of Apple management
And that has nothing to do with Apple per se. It's equally true of every company.
And too, I am neither saying that what Apple is doing is good or bad. We just have to trust them. Or not. That's a personal choice or, more correctly, a personal gamble.
When there exist clear benefits to performing some action, as Sacto Joe and I have both detailed in previous messages, and those benefits are generic to any context, in this case generic to any business buying back shares while they are undervalued, you need not know or guess about other, potentially hidden or non obvious motivations. Occam’s razor.
A very honest questions to you since you have taught yourself far more than I know about it: How does Apple's appreciating stock price help Apple themselves?
I don't see any monetary benefit to the company themselves. They aren't issuing any new stock to fund business expansion or development, and the share of repurchased stock has no monetary value going forward since it's retired. The only potential value I see is for an investor (and has that even been shown effective in this case yet?) and not Apple the corporation, but it's certainly possible there's parts of it I don't understand.
The short answer (though there are other aspects of the situation and ways of considering the effects of share buybacks) is: The main point of buybacks isn’t to benefit the companies themselves (as you are distinguishing them from their shareholders). The main point is to benefit their shareholders. That’s why buybacks are referred to as one of the ways of returning capital to shareholders. Dividends are another way of returning capital to shareholders. The main point in paying dividends, as is the case with share buybacks, isn’t to benefit the corporation (as a going concern) which is paying them.
With buybacks, the companies are in effect buying shares of the company for existing shareholders. After a buyback, each remaining outstanding share represents greater ownership of the company. Instead of owning twice as many shares, e.g., a shareholder may own the same number of shares with each one representing twice as big a piece of the company. The practical effect is, in many relevant regards, the same. Instead of giving the money directly to existing shareholders and letting them decide to buy more shares with that money, the company buys the shares itself (and retires them). There can be tax benefits to doing it that way. If a given shareholder would rather have the money (and keep the same effective amount of equity in the company as they had before), they can sell a corresponding amount of shares. They would then have the cash value of the new equity which the company had bought on their behalf, and still own the same size piece of the company (and the same share of its earnings going forward).
That said, there can be benefits for the company itself in supporting (or, e.g., helping to stabilize) its share price. But those benefits aren’t really the point, at least not in Apple’s case. If a company believes its shares are substantially undervalued, and it has cash which it doesn’t foresee needing or using for business purposes, then it’s almost a no-brainer to buy back stock. And if a company believes the market in general isn’t highly valuing the cash it is holding, relative to how the market values (or likely will in the future value) its operational results, then it can make sense to buy back stock.
The idea is that the loss of cash (as considered on a per-share basis) is more than offset by the concentration of equity in the company - i.e., the greater share of the company’s future earnings which each share will represent. I can own 1% of a company expected to earn X and which holds cash in the amount of Y, or I can own 1.25% of that same company expected to earn that same X but which holds an amount of cash less than Y. Where the numbers land, of course, plays a large role in the consideration of whether buying back stock makes sense (for shareholders).
Analysts and Arm-Chair Analysts each either try to defend or condemn Apple's BuyBacks. And everybody tries to understand them and their reasons and ramifications.
As an ex-accountant & internal financial analyst, I can say that none of them know what they're talking about. Yes, they get all the financial statements with all the numbers. But the real knowledge is what is behind those financial statements as explained to executives in internal meetings and then expanded out into internal long-term strategy meetings -- all stuff that neither we nor the external analysts will ever know about.
But, Apple is not the only company doing it. And what one analyst said is relavent: One of the major reasons the stock market has been so high (over the past several years) is simply due to its huge amount of stock buybacks. So, the question then is: What would Apple's stock be valued at -- as well as the overall stock market -- if those enormous buybacks had never happened? Or, what will happen when they stop? And that may happen sooner rather than later as interest rates rise making debt more expensive.
Apple remains undervalued, in part, because of a lack of appreciation that it’s stock buybacks are NOT a gimmick. I can’t speak for any other company. The reality is that the buybacks are strictly based on cash purchases. Yes, debt was acquired during the years Apple’s foreign cash remained in limbo. But that debt was always covered by cash. Indeed, the move to “cash neutral” means that there will still be cash available equal to the debt even after that point is reached somewhere between 3 and 5 years from now.
The cash Apple spends on buybacks has the effect of increasing each remaining share’s percentage ownership of Apple the company. Thus, if you had bought a share just before the buybacks commenced, your share would represent ownership of well over 35% more Apple. When (not if) Apple reduces the share count to half of what it was before buybacks commenced, each share will equal exactly twice the ownership it did before. Thus Apple’s buybacks are NOT a gimmick, but a legitimate way of returning value to the investor, with the added benefit of deferring taxes until the share is actually sold (unlike dividends outside of an IRA).
The value of AAPL absent these buybacks, IMHO, would be substantially reduced. The fiction would continue that Apple is NOT, as Jim Cramer recently put it, an incredibly successful, rich, and international razor-and-razorblade company, but only a “manufacturer” with ultra-high margins that were bound to be commoditized, and that it’s huge cash surplus was worth nothing vis-a-vis it’s future value and should not be considered when weighing it’s P/E against other companies.
The Awakening is finally happening, in part because Apple now has access to it’s cash worldwide, in part because it has clearly returned incredible value to it’s investors via the buybacks it has already made, and in part because people like Warren Buffett are finally “getting” Apple and realizing what an amazing value it is in terms of future valuation.
You can call me an “arm chair analyst”, but I’ve put my money where my mouth is, that is, by investing heavily in Apple for the long haul. I’ve paid my dues over the decades I’ve owned and watched Apple and AAPL. And I’m in very good company, with the likes of Horace Deidu of Asymco very much in my camp.
So I’ll stack my personal analysis up against your so-called “expertise” any day of the week.
"Expertise"? I never claimed that.
What I did claim was experience preparing and presenting financial statements -- and the stuff that caused them to be what they were TO MANAGEMENT. Yes, everybody sees the financial statements. But only management knows what caused them to be what they were and only management is privy to the strategies and reasoning going forward.
So do I know why Apple is doing this? No.
Do the analysts know? No.
Do you? Not unless you're part of Apple management
And that has nothing to do with Apple per se. It's equally true of every company.
And too, I am neither saying that what Apple is doing is good or bad. We just have to trust them. Or not. That's a personal choice or, more correctly, a personal gamble.
When there exist clear benefits to performing some action, as Sacto Joe and I have both detailed in previous messages, and those benefits are generic to any context, in this case generic to any business buying back shares while they are undervalued, you need not know or guess about other, potentially hidden or non obvious motivations. Occam’s razor.
A very honest questions to you since you have taught yourself far more than I know about it: How does Apple's appreciating stock price help Apple themselves?
I don't see any monetary benefit to the company themselves. They aren't issuing any new stock to fund business expansion or development, and the share of repurchased stock has no monetary value going forward since it's retired. The only potential value I see is for an investor (and has that even been shown effective in this case yet?) and not Apple the corporation, but it's certainly possible there's parts of it I don't understand.
An appreciating stock, as DED mentioned, can be an incentive used in the onboarding and retention of valuable potential and existing employees through issuance of stock options with future vesting dates.
Ah, keeping the executive team happy. Well that would be a good reason.
Two points. First, stock options aren’t just for the executive team. Second point: that being said, yes, it is important to provide financial incentive to a company’s executive team. Presumably these folks have been selected based upon confidence in their ability to manage the business and move it forward. And therefore you’d want to retain them through time.
For those considering whether Apple's share buybacks have made sense for them, as shareholders, the consideration might be simplified in this way:
Would you rather own 1.41% of Apple, as it exists today with a net cash position of $129 billion, or 1.00% of a hypothetical Apple which might exist and which would be very similar to the Apple which exists today except that it would have a net cash position of around $380 billion (giving it a fair amount of interest on the money it wouldn't have spent buying back shares)?
Of course, that is oversimplifying the consideration. It assumes that Apple wouldn't have done something else with that cash. And changing one thing has the potential to change many other things. We're dealing with a counterfactual and don't, of course, know the unknowns which would need to be plugged in. But not accounting for those unknowns (which could cut either way), that is the basics of the situation. If you held a given amount of stock though-out the recent period of Apple buybacks (about 5 years for the vast majority of the buybacks), you now own 41% more of the company than you would have had Apple not bought back any stock. And the company you now own 41% more of is light around $250 billion. (That's not taking into account the amount of money Apple saved on dividend payments over the period at issue.)
Considering the situation another way: Do we think Apple's market cap would be 41% higher today if it had that extra $250 billion or so? We could own 1.41% of the current market cap or 1% of whatever the market cap would be if shares hadn't been bought back (or any other percentages so long as they were in the same ratio to each other).
Would the market, in its collective wisdom, value Apple at 41% more today if Apple had just sat on the cash it spent to buy back stock over the last 5 or so years? I don't think so. And other than sitting on that cash (in mostly fairly conservative investment vehicles, or as realized by having less debt of its own), what else do we think Apple would have done with it? I don't think Apple would have done anything else with most of it, hence the massive buyback programs.
Late the game but what should Apple spend some of this money on?
Try buying SNAP? Come out with a fully automatic iOS camera for $3000?
Or release a self driving EV car in a couple year. I didn't think they should do it a year ago but they seem to be getting MAPS into better shape and think SIRI will be making some great improvements soon with the new guy in charge of it.
I think Apple could do everything Tesla has done but execute it better (although I don't want Apple to Kill Tesla).
Comments
CONCENTRATION VERSUS DIVERSIFICATION
With the above in mind, you also need to be able to follow, closely, your investments. To follow a business, you need to understand the business and its success factors, its marketplace, its competition, how it compares to that competition, what technological changes are on the horizon that might impact the business, the legal, regulatory, and political landscape associated with the business, etc. Even so-called professional analysts, because they attempt to cover multiple, often many, businesses, nearly always get it wrong on a large and well followed and reported-on business like Apple. How many people can follow even three companies, in three different industries, with different metrics as measures of success? How many even know the metrics of success for even one company in which they take a position? Stock picking, itself, is for the vast majority of those who participate, casino betting. Diversification, in this context, is appropriate since you would want to limit exposure to any individual bet.
With the definition of investment in hand, it's a matter of screening for companies that are structurally sound; strong earnings at a relatively low multiple, solid balance sheet with net tangible assets not far below total stockholder equity (i.e., little of the company's assets represented by the Goodwill and Intangible Assets line items), and plenty of cash/cash equivalents to carry the company through downturns or changes in the direction of the business.
Also look for a history of organic growth versus acquisition-based growth, a strong brand and competitive position, no significant impediments to growth, no significant risks such as lawsuits or potential for lawsuits (think medical device manufacturers and the hip implant lawsuits that have cost them billions), and technological leadership (which can be associated with the company's product technology or associated with process technology or even marketing technology; you want some significant technology lead that gives the company a clear edge).
There are other things to look for, some that depend upon the particular business. I look for a business that excels in whatever metrics are most critical for success and growth in the industry/segment in which the business participates. And it should be comprehensible to a non-expert in the field; buy what you know.
The temperament and discipline to stay the course and not get thrashed moving from one stock to another can be bolstered by having strong confidence in the businesses in which you place your investable funds, so knowing the workings of each business and its competitive environment is key. And that leads to the question... how much can you know about 10 businesses versus two or three at-a-time? The answer is obvious and points to the fact that you should consider concentrating your holdings only when you know a business cold, and diversify your holdings when you don’t. And leave speculation to those who know how to win at that game.
With buybacks, the companies are in effect buying shares of the company for existing shareholders. After a buyback, each remaining outstanding share represents greater ownership of the company. Instead of owning twice as many shares, e.g., a shareholder may own the same number of shares with each one representing twice as big a piece of the company. The practical effect is, in many relevant regards, the same. Instead of giving the money directly to existing shareholders and letting them decide to buy more shares with that money, the company buys the shares itself (and retires them). There can be tax benefits to doing it that way. If a given shareholder would rather have the money (and keep the same effective amount of equity in the company as they had before), they can sell a corresponding amount of shares. They would then have the cash value of the new equity which the company had bought on their behalf, and still own the same size piece of the company (and the same share of its earnings going forward).
That said, there can be benefits for the company itself in supporting (or, e.g., helping to stabilize) its share price. But those benefits aren’t really the point, at least not in Apple’s case. If a company believes its shares are substantially undervalued, and it has cash which it doesn’t foresee needing or using for business purposes, then it’s almost a no-brainer to buy back stock. And if a company believes the market in general isn’t highly valuing the cash it is holding, relative to how the market values (or likely will in the future value) its operational results, then it can make sense to buy back stock.
The idea is that the loss of cash (as considered on a per-share basis) is more than offset by the concentration of equity in the company - i.e., the greater share of the company’s future earnings which each share will represent. I can own 1% of a company expected to earn X and which holds cash in the amount of Y, or I can own 1.25% of that same company expected to earn that same X but which holds an amount of cash less than Y. Where the numbers land, of course, plays a large role in the consideration of whether buying back stock makes sense (for shareholders).
Would you rather own 1.41% of Apple, as it exists today with a net cash position of $129 billion, or 1.00% of a hypothetical Apple which might exist and which would be very similar to the Apple which exists today except that it would have a net cash position of around $380 billion (giving it a fair amount of interest on the money it wouldn't have spent buying back shares)?
Of course, that is oversimplifying the consideration. It assumes that Apple wouldn't have done something else with that cash. And changing one thing has the potential to change many other things. We're dealing with a counterfactual and don't, of course, know the unknowns which would need to be plugged in. But not accounting for those unknowns (which could cut either way), that is the basics of the situation. If you held a given amount of stock though-out the recent period of Apple buybacks (about 5 years for the vast majority of the buybacks), you now own 41% more of the company than you would have had Apple not bought back any stock. And the company you now own 41% more of is light around $250 billion. (That's not taking into account the amount of money Apple saved on dividend payments over the period at issue.)
Considering the situation another way: Do we think Apple's market cap would be 41% higher today if it had that extra $250 billion or so? We could own 1.41% of the current market cap or 1% of whatever the market cap would be if shares hadn't been bought back (or any other percentages so long as they were in the same ratio to each other).
Would the market, in its collective wisdom, value Apple at 41% more today if Apple had just sat on the cash it spent to buy back stock over the last 5 or so years? I don't think so. And other than sitting on that cash (in mostly fairly conservative investment vehicles, or as realized by having less debt of its own), what else do we think Apple would have done with it? I don't think Apple would have done anything else with most of it, hence the massive buyback programs.
Try buying SNAP? Come out with a fully automatic iOS camera for $3000?
Or release a self driving EV car in a couple year. I didn't think they should do it a year ago but they seem to be getting MAPS into better shape and think SIRI will be making some great improvements soon with the new guy in charge of it.
I think Apple could do everything Tesla has done but execute it better (although I don't want Apple to Kill Tesla).