Lessons On Investing From Apple Inc.


Let me first start by saying this is not a post about Apple’s products.  While I’m certain Apple’s products are probably fantastic (I don’t own any), that’s not what interests me about Apple The Company or Apple The Stock.

What interests me is Apple as an investment.  Today, it’s one of the largest companies (by market cap) traded on the NY stock exchange.  With annual cash from operations exceeding $77 billion USD last year (2018), it’s safe to say that Apple Inc. is a titan of industry.

But it was not always thus.  Apple was once a struggling computer maker that would occasionally have years where sales would decline and they’d lose money.  This was back in 2000/2001, long before the iPhone ever existed.  In those days, most of the company’s revenue came from selling PowerPC based Macintosh computers.

An early Macintosh computer.

It’s fairly safe to say “the company was struggling” in the late 90’s and early ’00’s.  At the time, Apple had difficulty competing with cheaper and more powerful Windows/Intel based computers.  As a result, sales suffered and the stock price struggled too.

One day in particular was a terrible one for the stock —  September 25, 2000.  The shares opened at $3.77 and closed at $1.84 (all prices are split adjusted).  Essentially the shares dropped by 50% in a single day and in the two years following it was possible to buy shares in Apple for less than a dollar per share.  Today those same shares sell for over $166 per share.

Theoretically, if you’d invested $10,000 at $1 per share back then, the investment would be worth over $1.66 million today.  That’s an impressive return in anyone’s book.  Mine included.

I happen to remember September 25, 2000 very well, because my best friend decided to buy Apple shares the following day.  I didn’t, and I remember distinctly the reason why (even though this was nearly 20 years ago) — I believed the company had no future.

Boy was I wrong!  Predicting the future has never really been my speciality I guess… but I wish I’d bought those shares too.

To be fair, Apple earnings during that time period weren’t great (even during the profitable years).  If you curious, you can go back and read Apple’s extremely old annual reports here.

I wasn’t the only one to think Apple wasn’t going to last much longer either —  Michael Dell, CEO and founder of Dell computer was once quoted as saying to a crowd of journalists, that if he were made CEO of Apple, “I’d shut it down and give the money back to the shareholders.”

 

Learning From Apple

Apple is an interesting investing case to study.   While everyone likes to point the finger at Steve Jobs for the giant success of the company,  I don’t think that’s the entire story when it comes to investing.  Part of the story, yes, but not all of it.

Like my Nintendo case study, Apple suffered through the ups and downs of a product cycle.  They had hits and misses.  Yet unlike Nintendo, Apple went on to earn incredible gains for investors.  Nintendo was a big laggard by comparison.

NTDOY vs. AAPL
This chart sums up the experience of being a Nintendo shareholder vs. being a Apple shareholder over the last decade.

Both are world class companies with a fervent fan base.  Both are quality companies that produce very high quality products.  Yet Apple was clearly the winner for investors.

So, what lessons can we learn from the Apple of 20 years ago, that might teach us to be better investors today?

 

Lesson 1.  A Stable High-Margin Niche

One of Apple’s big secrets to success (I believe) was serving a high-margin niche that was fairly stable.  For decades Apple sold Macintosh computers into the education and graphic artist markets, and earned very high net margins as a result.  Typically around 10% or higher.

Initially, this niche was a nice competitive advantage for Apple because they served those customers particularly well, with easy-to-use computers.  Back in the day when every computer user was still fighting with the occasional command prompts, Apple had a fully fleshed-out GUI.  If you didn’t want to struggle with difficulties of using a PC, Apple was really the only other game in town.

mac os
The classic Macintosh graphical interface was far easier to use for education and creative types who didn’t want to struggle with DOS.

Unlike the lower margin PC business however, Apple charged a premium for their computers.  They still do today.  And their customers are willing to pay it.  Back in those early years, this stability from a loyal customer-base really helped Apple sustain the company during bad years.

During “good” years, those large margins also generated significant free cash flow for new investments (more on this later).

 

Lesson 2.  Try A Lot Of Different Things

Maybe its a corporate culture thing, but Apple has this history of trying “different” things.  Most of them weren’t hits.  From digital cameras, to CD players, printers, the Newton PDA, and even a game console, Apple has tried out a lot of different products over the years!  Apple kept trying to branch out into new categories that were not personal computers.

In other words — Apple management was continuously willing to keep trying new things.  They had the cash flow and a stable customer base to afford to keep failing over and over again.

quick take cameras
Anyone remember the QuickTake cameras? Back in the mid 1990’s Apple tried a creating a line of digital cameras.  The line was discontinued in 1997.

Eventually, they did generate some hits — starting with the iPod, and eventually the iPhone and iPad product lines.  But it took many failures before they found fantastic success.

It’s fair to say that Apple creates plenty of flops, but my point is they keep trying to branch out.  Over and over again.

It’s almost as if Apple management understood the business that sustained them in the past (personal computers) would not be the business that sustains the Apple of tomorrow.

 

Lesson 3.  Market Reactions Are Meaningless

Probably one of the most important lessons investors can learn from Apple is that market reactions are truly meaningless in regards to long term performance.  I mentioned one incident where Apple’s stock price dropped by 50% in the past, but there have multiple incidents where Apple’s stock price in the past has seen serious volatility.

For investors, this level of volatility is probably pretty hard to cope with, especially since the company didn’t pay dividends (at the time).  Most investors don’t like to see a lot of volatility in their investments, and thus got spooked and sold during one of these volatile periods.  But this provides an important investing lesson — Don’t get spooked by volatile market movements.  The Markets truly do not know what’s coming any more than you do.

Day-to-day movements can be absolutely wild.  This just reinforces the point that investors can’t really predict the future.

 

Lesson 4.  Apple Wasn’t The Most Shareholder Friendly

Here’s something I found interesting during my research of Apple as a stock — Apple really wasn’t a very shareholder friendly company.  For one, they didn’t pay dividends for decades.  They also offered very lucrative option and share packages to executives that seriously diluted the shares outstanding.

shares outstanding
Executives were given large stock option plans that seriously diluted shareholders.

Only recently has Apple started buying back stock and began to rectify the unusually high levels of dilution.  For shareholders, dilution means you own a smaller and smaller piece of the company every year despite continuing to hold the same number of shares.  There was significant dilution at Apple as executives were richly rewarded.

The company even had a stock option backdating scandal that seems to indicate someone was playing fast and loose with stock option grants at Apple.

Despite the lack of shareholder friendly policies such as share buybacks and dividends, long term investors would still have done ‘OK’ in Apple stock.  Nowadays (of course) the company buys back a significant number of shares AND pays a dividend.  It’s far more shareholder friendly than it used to be.

The Lesson Learned here?  Don’t give up on an investment just because of poor shareholder policies.  If the business is good enough, it can trump any nonsense going on in the board room.

 

Lesson 5.  More Than Just One CEO

While Steve Jobs is often credited for much of the success of Apple Inc., we shouldn’t forget that a company like Apple is more than just one CEO.

Following Steve Job’s death, Tim Cook took the reins and the share price has since tripled.  Investors have done very well without Steve Jobs over the last few years.

While the cult of personality surrounding Jobs was impressive, it’s an important lesson for investors to remember that a company isn’t just one person acting alone.  There are multitudes of people that create, engineer, and market products like the iPhone.  Jobs didn’t do it alone.

While some people might argue that Apple’s products have been less innovative in recent years, profitability certainly wasn’t hurt by his passing.  Apple has continued to prosper because they had a proper succession plan in place, plenty of money being invested in R & D, and of course many skilled individuals ready to design the next Apple product….

Which will no doubt sell extremely well.

 

Conclusion

Apple is an interesting case to study, isn’t it?  The company has had such a long and storied path to success.

I find that success is most obvious in hindsight, but even the largest companies had to start somewhere (as a small company).  It’s what companies do when they’re smallest that I think investors can learn the most from.  How did they survive?  What moves did they make to outfox the competition?  And most importantly — can it be sustained into the future?

While I didn’t buy shares in Apple 20 years ago, I don’t kick myself and regret the move.  I’ve learned a lot since then, and I’m still not certain I could have foretold what a smashing success Apple would become.

Instead, I try to learn what I can from the mistake.  After all, it’s not a failure, just an unfinished success. 😉

 

[Image Credit: Flickr1, Wikimedia]

22 thoughts on “Lessons On Investing From Apple Inc.

  • February 2, 2019 at 7:14 AM
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    Nice post, great way to summarize their history from a financial and risk optic. My high school had a few of the first Apple IIE’s, and I was lucky to work with them. You’re right, back then they introduced the GUI interface while PC’s made you type command line. They were indeed innovators. I loved their early computers.

    But now they don’t have that edge in functionality. I can get just as much and usually more functionality from non-Apple products than from Apple, and at a fraction of the cost. But they successfully transitioned their company from the company that has the edge on functionality, to the “fashion-hip” company. And it’s clear that “fashion-hip” sells with America, and people will pay premium for it.

    Reply
    • February 4, 2019 at 12:53 PM
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      Certainly, there is a huge population of people that want affordable luxuries, and Apple found another niche in that space. How long they can maintain that luxury status… well, who knows!

      Reply
  • February 2, 2019 at 7:31 AM
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    Don’t feel bad about not buying Apple way back when. Their profit today mostly comes from product lines that didn’t exist in 2000! It’s basically an entirely new company vs 20 years ago.

    It would be the same as buying Sears today for a buck or whatever the shares are worth and then 20 years from now they have supplanted Amazon and Walmart as the leaders in ecommerce and multi-line retailing. It could happen! But I’m betting zero dollars on it and you should do the same. 🙂

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    • February 4, 2019 at 12:54 PM
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      You make a very good point Justin! I probably wouldn’t buy Sears today for exactly the same reasons why I didn’t buy Apple 20 years ago… it doesn’t look like they have much of a future. 😉

      Reply
  • February 2, 2019 at 7:50 AM
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    The point about constantly trying new things is an important one. A lot of failures sprinkled with a few huge successes has served Apple well. The financial media still loves to run articles about any Apple attempt that underperforms – I guess it all depends on if we think they’ll continue to find gems, either with their products or their services attempts.

    I wasn’t an Apple investor, so I didn’t know about the executive package and resulting option dilution. Interesting read, thanks!

    Reply
    • February 4, 2019 at 12:56 PM
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      Oh yeah… silicon valley companies = terrible dilution for shareholders. Those executives love to pay themselves a ton, at the expense of shareholders. Growth has mostly hidden that travesty, but it won’t happen forever.

      Reply
  • February 2, 2019 at 8:12 AM
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    I didn’t buy Apple either. I’m on the PC side. Who would pay a bunch more for a little better user experience? The PC would catch up on the feature in a few years. I could wait that long. Alas, the consumer mindset changed over the last 20 years. Now, people rarely hesitate to pay more for cutting edge technology and luxury. It’s crazy to me, but corporations successfully made luxury goods a priority. Now, it’s more important to have luxury than saving money. Nuts.
    It’s pretty amazing how successful Apple is.

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    • February 4, 2019 at 12:57 PM
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      It really is amazing how they’ve transformed themselves. The mac business is a relatively small part of the company today even though it’s grown considerably.

      Yet, that was the seed that sustained the company until they stumbled onto a few ‘hits’. 🙂

      Reply
  • February 2, 2019 at 5:03 PM
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    Very cool insight. Did you friend still keep those shares or did he cash out?

    That’s the one thing that is hard to deal with as an investor. Back in the day when all I did was invest in individual stocks (I just went on name recognition etc) I had Amazon when it was trading at around $200. I believe I cashed out when it jumped to the high 500 low 600 range. I thought I did well but in hindsight if I didn’t sell I they would be worth 3x or more as much so even when I win I lost and have some regret.

    Now days I am almost all in index funds with just one individual stock (tesla) which I also got in around 210. It has been going all over the place as high as 370. Hopefully it is the next Apple and can be a winner for me but overall it is such a small amount that even if it does go big I wouldn’t have much to write home about

    Reply
    • February 4, 2019 at 12:59 PM
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      I know he held onto those shares for a few years at least. Then, the startup company we were working for went belly-up and I lost touch with him (sadly). I don’t know if he still owns them or not.

      Reply
  • February 2, 2019 at 6:45 PM
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    Dont’ feel bad, most of us didn’t have the guts to buy Apple back then. When di your friend cash out or does he still have the stocks?

    If I listened to myself I would have bought Google when it went IPO and Apple when iPhone came out. Lessons learned I suppose.

    As an Apple investor, what worries me right now is the lack of products. Majority of their revenue came from iPhone and people aren’t switching phones every year anymore. Mac and iPad sales are slowing down too. What’s the next big product from Apple?

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    • February 4, 2019 at 1:01 PM
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      Next big product from Apple? I can only speculate. I’ve heard rumors they’re working on self driving cars, and they’re just getting started in the smart-home space.

      Reply
  • February 2, 2019 at 9:37 PM
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    Even if you did have the foresight (and / or luck!) to decide to put some money in, the next big question is whether you would have held on over the full 20 years. I find it hard to keep holdings stocks that have made a high return, and become expensive, which no doubt Apple did many times during that period. I’m sure it’s only a rare few retail investors that have made millions from Apple – and if there’s a future Apple I doubt I’ll be patient enough to hold on for 20 years…

    Great case study though, thanks Mr Tako 🙂

    Cheers, Frankie

    Reply
    • February 4, 2019 at 1:04 PM
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      Thanks Frankie. I tend to be a long-term shareholder when I do buy shares, and for me that means a minimum of 10 years. I find the only reason to sell is if my original hypothesis about compounding fails to be true.

      I’ve got a few shares in my taxable portfolio I’ve held for over 18 years now.

      Reply
  • February 3, 2019 at 8:52 AM
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    Hi Mr. Tako,

    Nice post. As mentioned by one of the folks that commented before, I do not know if in your friend case was foresight or luck. Anyway, if we do not take risks we’ll never have the chance to step out of the average. And maybe for one Apple success case as a small company we could listen dozens of not so successful.

    What happens with Apple products is really…different. They are good, but we can see around other companies doing similar products and selling cheaper. My guess is that it is very related to status…you can even see some cell phone cases that have a hole in the back just to show that the Apple’s logo. Fortunately status is something that I do not care about…

    For the today investor (and I have a small position in the company) the concern is how long will take to the company to come with a new product that will sustain the growth for the upcoming years. As we have seen in tech cases, the first one to offer the product tends to have advantages in front of the competitors.

    I do not know if you allow links in the comments, but some of you remember the Forbes 2007 cover about Nokia? The tittle was: Nokia, one billion customers – can anyone catch the cell phone king?…and it was only 12 years ago.

    It is Sunday…my Apple watch says that is time to turn off my Macbook and my Iphone and relax watching some movies on my Apple TV 😉

    All the best.

    Cheers!

    Reply
  • February 4, 2019 at 11:45 AM
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    Hello Mr Tako,
    did your friend become FIRE like you did or did he sell his stocks at 3$ a few months later ? 🙂

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    • February 4, 2019 at 1:09 PM
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      I know he held onto the shares for a few years at least. Then, we kind of lost touch and I never heard what happened in the end.

      Reply
  • February 4, 2019 at 6:13 PM
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    From Apple, I learned why Warren Buffet does not like technology stocks. If we want to hold a stock for over 20 years, technology can make progress quickly, and the current popular companies will not be a good investment after 20 years.

    Reply
  • February 5, 2019 at 2:04 AM
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    Great post. What amazes me about Apple is the inter generational customer loyalty.

    Over 30 years ago my best friend – probably the most intelligent person I have ever known – was very analytical in everything except for the mac you show above for which he had an almost religious fervour for. He would forever highlight its merits and simple disregard its disadvantages as too trivial to concern him. We met up recently and he still is buying the full apple ticket.

    My Mum, 85 and a technophobe, loves her ipad and when it broke simply bought another one. I doubt she even knows other companies sell tablets.

    My daughter informed me a few years back she must have an iphone. No other brand of smartphone would do. She is now on her third despite the first two being not that great. I actually use her first one – replaced by her because the battery life was rubbish. The second simply fell apart when she tried to replace the screen saver. I did mention she might like to try a different brand and got THAT look! I also gave her some money to buy a basic laptop for college. She decided to use her own earnings to upgrade that to the latest macbook air. Of course she also has apple play too.

    The performance of the share price, in my view, is totally dependent on maintaining this customer loyalty. My problem is I simply do not have and do not understand this loyalty and so I find it hard to place a value on it.

    Reply
  • February 5, 2019 at 8:40 AM
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    Can you share the list of stocks that you have been able to hold for 15+ years? Thanks.

    Reply

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