Having the courage of my convictions

Listening to the radio while running errands Saturday, I heard a stock technical analyst (on his own infomercial) brag that by using charts, he bought Apple stock at (split adjusted) $12 in 2004. (Even with the recent correction, AAPL closed at about $573 on Friday.)

It was obvious that he knew nothing about the stock or the company when he bought it, but instead was reacting to trends in the shares. I get it: that’s what technical analysts do.

On the other hand, I know more about Apple, its history, its strategies, strengths and weakness than the majority of potential investors out there. I was an Apple software developer for 17 years. I did my PhD on Apple. With Michael Mace, I wrote perhaps the first academic research paper on the iPhone and the reasons for its success. But I never bought a single share of Apple stock after Steve Jobs returned. (In the 1980s, AAPL had a well-defined trading range, so I’d buy it for $25 and then dump it when it got up to $50 — then repeat the pattern.)

Some of this is because I’m not an active investor — I’m too busy. Some of this is because I have trouble judging “under valued” because I can’t assess the market psychology required to make that interpretation. And then there’s the conflict of interest: I sold Qualcomm shares H2 2008 because of the conflict with my SD Telecom blog. This was the only holding I cashed out before the financial crash, but I missed a net runup of about 40% since then.

So after hearing the expert on the radio, I thought I’d check when I might have bought AAPL.

The first of my 115 (so far) iPhone postings came in the ninth posting to my blog, on January 29, 2007. The posting summarized what a news report said about Apple-Verizon negotiations that led to AT&T getting a US exclusive. AAPL closed at $86 (I’m rounding to quarter-points).

On May 1, I opined on Apple’s sales prospects (AAPL closed at $99.50). I was very cautious on iPhone sales:

My prediction: the iPhone ramp-up is going to be slow, due to manufacturing problems and the Cingular exclusive, and thus only sell about 1.5 million phones in 2007. Over time, they will solve this with model proliferation beyond Cingular and eventually tap overseas markets. Therefore, I believe Apple will beat its (deliberately understated) prediction of 10 million phones sold for June 2007 - December 2008.

Instead, Apple sold 3.7 million phones in 2007, so I was off by more than 2x.

On June 2, I presented the first slides from our iPhone paper that said:

Our Premise
The iPhone could change the mobile phone industry:

• Nature of devices
• Vendor-consumer relationships
• Vendor-operator relationships
• Value and use of content

Of course, there are limits to drawing inferences based on vaporware

Apple shares closed at $118.50 on Friday June 1.

Finally, after the original iPhone mania the shares pulled back July 24 on AT&T activation news, closing around $135.

Normally I speculate in tech stocks with $10k in my IRA, but let’s assume I put $20k in after I gave my iPhone talk June 2. That’s $20k would be worth slightly less than $97k today.

So I “lost” about $75k not investing my money where my mouth was. That wouldn’t put me on easy street, but it might have allowed me to retire a year or two earlier, or pay for a year of college for my teenager when the time comes.

Given Apple is not going to retrace the past five years, I’m not sure what’s actionable here. And unless I’d bet on AAPL to the exclusion of almost any other tech stock, my wins would have been diluted by a stock that went sideways (MSFT) or lost money (NOK down 7x).

Marks to market: buy low, sell high

I normally don’t write about stock prices, because my interest is successful company strategies, on the assumption that prices will eventually work out.

However, I would encourage all investors to read Jason Zweig’s Intelligent Investor column in Saturday morning’s Wall Street Journal. Five minutes changed how I think about investing forever.

The nominal premise of the column is to review two books, Safety Net by James K. Glassman (co-author of the 1999 tome Dow 36,000) and also The Most Important Thing by Howard Marks.

Glassman says the asset classes he recommended in 1999 were wrong, but now he has it right. Either way, stocks are better investments than bonds in the long run.

Marks disagrees. We all know about avoid market bubbles, but the implications are more invidious than that. As Zweig summarizes Marks:

Riskier assets don't necessarily offer higher returns, Mr. Marks says; they only appear to do so. "It's really simple," he says. "If risky investments could be counted on for higher returns, then they wouldn't be risky. And if investments weren't risky, then they probably wouldn't appear to promise higher returns."

By chasing the potential for higher return in riskier assets, investors drive prices up. Under the classic definition of risk—how widely the returns deviate from the average—that alone doesn't make assets more dangerous. But by Mr. Marks's common-sense definition of risk—"the likelihood of losing money"—rising prices are pure investment poison. The higher and faster prices go up, the farther and harder they have to fall.

It’s easy to find an example of this. In the 1990s US stocks exploded, while in the 2000s the market went sideways for a decade. Are the businesses less attractive as going concerns? No, what’s changed is the market sentiment.

The (Nobel prize-winning) capital asset pricing model — calculating risk-adjusted returns — assumed that riskier investments will be discounted and thus provide a bigger potential upside. Marks says that only works if market sentiment hasn’t pushed up the price of that investment (or investment class).

So theories of efficient markets, risk-adjusted returns, and modern portfolios have to take a back seat to a much simpler and older investment theory.

Buy low, sell high.

In other word, go back to Dogs of the Dow, Value Line, or other value-based investment strategies. That means missing the run-up in Apple shares (other than the first few years of Jobs II), but also not riding Microsoft, Intel and Nokia down over the past decade.