Brett Arends (WSJ)
What do Apple, Inc.’s craziest fanatics, Wall Street, and the case of the Harvard professor and the police officer have in common?
They don’t just show a lot of bad thinking. They show a lot of the same bad thinking.
After all, studies have found that human beings tend to fall back on a handful of common mistakes when analyzing complex situations.
As with Wall Street and the case with Prof. Gates, people tend to fall back on a handful of mistakes when analyzing complex situations.
When investors make these mistakes, they lose money. Which is what concerns us here.
Research says human beings tend to assume they know much more than they actually do. And they tend to overestimate their ability to guess, or predict, what they don’t know – from the future direction of the economy to what really happened on Gates’ porch.
People tend to seek out facts that support the beliefs they already have, ignore evidence that points the other way, and cling to their opinions, even wrong ones, like a drowning man to driftwood. Bulls and bears always find evidence to back them up. So do people on both sides of an argument.
Most humans want to be part of the crowd. Witness how many lined up in their usual “teams” (political or cultural) last week. Or how many investors jump on the “hot” stock that “everyone likes”.
On Wall Street, it’s frequently profitable to go against the crowd. But it’s tough to do.
People are too quick to make facile comparisons — we assume the future will be like the past, our own experiences are typical, and so on. So we are apt to think a stock that has outperformed in the past will outperform in the future — or that a particular instance involving a black man and a white police officer will resemble other, completely separate, instances.
All of this brings me to Apple, Inc.
While the row about Prof. Gates was snowballing last week, I was getting a lot of emails from Apple fans following a column about their favorite stock.
Obviously, some of this is just from the crazy Apple jihadists — the Macahideen. But the stock is also popular with a lot of normal, grown-up Americans. And while they may not share the paranoia or derangement of their dysfunctional counterparts, many, it seems, are making similar errors of thought.
But the stock is also popular with a lot of normal, grown-up Americans. And many, it seems, are making some classic errors of thought.
A great company is not the same thing as a great stock. And Apple shares, while certainly not wildly expensive, are not dirt cheap, either.
Profit margins have been high so far. That doesn’t mean they will stay high. Competition does not vanish, nor does it stand still.
Sure, Apple may “win” the “war” of the cell phones. But investors cannot possibly know that now, no matter how “sure” they feel. And this isn’t like “winning” at baseball (a false comparison). If the “losing” teams respond by giving their products away cheaply, no one will make any money, not even the “champ.”
Several correspondents said I was “assuming” that Apple would launch no new killer products. Not at all. I am assuming nothing. It is those who are investing who are assuming Apple will launch such products, and that they will be as successful as previous products.
The alternative to owning Apple stock is not owning Microsoft or Palm stock. It’s owning an index fund, or a managed fund — or even just cash while you wait for better opportunities.
Entering a dangerous area
I will repeat my caution. Over the past five years Apple has gained nearly 60% a year. The chance that it will do the same over the next five is remote. That would make it worth $1.25 trillion. The returns are likely to be more modest. And the risks will be greater.
When investors get emotional or wedded to an investment, they enter a dangerous area. They start seeing nothing but good news and green lights ahead. They downplay the risks. This is a perennial human weakness. It’s especially the case with Apple.
Last Christmas, when it was $86, I recommended the stock. Today, at $160, it is a lot less attractive. It’s about 28 times likely earnings. That’s about twice the stock market’s long-term average.
James Montier, the brilliant investment strategist who just left SG Securities in London to join Boston-based fund legend Jeremy Grantham, likes to point out that glamorous growth stocks have usually proven poor investments. Investors, believing they can foresee what they can’t, have tended to overpay for growth.
Two years ago, when the iPhone was first launched, I observed that it was too expensive, and lacked downloadable third party applications, Voice over Internet, and the ability to download music and podcasts (from iTunes) over the air.
Steve Jobs subsequently … slashed the price, introduced third-party applications, Voice over Internet, and over-the-air downloads. The same fans who had taken issue with my initial criticisms then hailed Jobs as a genius for those moves.
The reality is that they don’t know what’s going to happen in the years ahead, and nor does anybody else.
As Mark Twain once said, it ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.