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Want A Quick & Dirty Primer on Investing? Here's An Email I Just Wrote

An unedited email I just sent a friend regarding his trust and whether his trustee should invest in Apple or not.  You can't see the email exchange, but you may be able to decipher it:

 

Hey man, a few comments as it relates to portfolio theory, my own experience running an equity-based investment shop, and my personal retirement investments:

1.  As you know, I'm long apple and it represents a significant portion of my long-term retirement portfolio, actually $30K worth.  I also own about 20 mutual funds a few bonds, Goldman Sachs, an energy company (EGY), and the DJIA tracking stock (DIA). 

2.  Equities get a bad rap due to the glorification of day trading during the dot com boom and their comparative "riskiness" as they relate to mutual funds or fixed income.  The fact is, however, that literally ALL of my portfolio returns over the last 6 years have come from 4 things:  AAPL, GS, EGY, DIA -- the four equity-related stocks.  The bonds and mutual funds have been a wash.  It's true that they're less risky as it relates to the "world" of equity investing, but it puts a damper on both the downside AND the upside. 

3.  The key to all of this is something called the Sharpe Ratio, which is just fancy finance speak for "risk-adjusted return".  In layman terms, it's a measure of how big a return you can expect per unit of riskiness.  I've chosen the gold standard Apple and Goldman Sachs because they're literally not going anywhere.  Apple has a cash runway until 2018, that's nuts!  Warren Buffet invested in Goldman (yes, he got preferred, but it's still a sign of trust).

4.  As it relates to Dividends, there is always confusion about this.  Most people think that stocks that pay dividends are actually paying you, but in fact the dividend yield is already baked into the fair market value of the stock price.  Thus, you're actually worse off due to the time value of money because you're not receiving the full value of the stock in the present time (present value of discounted cash flows, in this case, dividends).  You have to wait for each future value dividend payment in perpetuity (i.e., forever) in order to get the full value of the stock.

5.  Thus, never buy stocks for the dividend, instead take the buffet approach.  Understand everything there is to know about the industry, the company, their competitors, their customers, supply chain, and add into it anything that you don't think is baked into the stock price (in Apple's case, nobody baked the iPad into the stock price 2 years ago, but the current stock price does.  That's where fundamental and technical analysis of any stock breaks down).

6.  In Apple's case, I know absolutely everything (public) there is to know about the governing dynamics affecting this stock, including things that I don't think have been baked into the stock, such as the billion dollar data center in North Carolina they've been building for years that nobody knows what it's for (the rumor is streaming/cloud itunes and music, but I'm guessing it's going to go much deeper than that).

7.  In summary, I'm actually still investing in Apple and have yet to sell a share of stock.  My return is pretty significant over the past few years (you only need to look at a stock price chart on Google finance to see that).  My only regret was listening to a naysayer when it was at $80/share instead of trusting my gut.  Because of that, I missed out on an $80/share gain.

8.  My price target for apple, barring Steve Jobs untimely death and Jony Ivy leaving for the UK is $500/share within the next year.  Last quarter their revenue AND profit doubled.  Let me repeat that.  It FUCKING DOUBLED!  Do you know the degree of difficulty for pulling something like that off even for small companies?  Now take a huge, global company like apple and try to do that.  It's unprecedented and people still can't get their hands on an iPad 2 because supply is still constrained.  What's going to happen when the iPhone 5 comes out.  I'll tell you what.  Pan-de-freaking-monium.

9.  I'll leave you with one final thought.  Name one other brand (company, musician, person, anything) that people are willing to stand in line for a week for.  Other than Michael Jackson (RIP), I can't name one.

 

Investing

Here's To The Entrepreneurs...

P942

“Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things.”

—Apple Think Different ad campaign