My Rotten Apple Mistake
Imagine yourself back in 2006, at a meeting in a windowless conference room at BusinessWeek,convened to discuss technology story ideas. The usual perennials come up: How long will the Microsoft hegemony last? Something about cell phones and miniaturization of this or that. And of course Apple: Anything with a photo of Steve Jobs has been a sure draw for any business publication for as long as anyone can remember.
Apple had come back from the brink and was clearly the pacesetter in computer design. The MacBook series was a huge success. The iPod and iTunes had already redefined music. The iPhone hadn't been released yet, though the rumors were already gaining force. But a big story about Apple?
“Look,” one writer said, “the stock's already at $70 a share. Do people think this company is going to be worth $100 billion? Really? How many iPods can those guys sell?”
That writer, unfortunately, was me. The Apple story was shelved. Since then, Apple's laptop market share has only gone up. The iPhone redefined the company. And the stock. Yes, it's now at $200.
Reporters make bad stock pickers, and I'm no exception. Very rarely have I had the temerity to actually recommend a specific stock. When I have a stock idea, I almost never put it in a story. There is a good reason for this: Usually I am wrong. Why is this the case?
1. Reporters have a big prejudice toward value investing. Our jobs are to analyze the truth of what's going on in an institution—whether a corporation or a government agency—and separate it from “the hype.” This means trying to separate out public perception from “objective” results. Reporters don't like companies whose earnings don't justify their share price. Surely at some point logic must take hold and the share price will fall, right?
When it comes to investing in new technologies and ideas, though, the logic of value investing doesn't hold. Some companies, including, obviously, Apple under Steve Jobs, have been able to repeatedly create strategies and inventions that extend their business in new directions. These companies are what stock pickers like to call the “10 baggers” that let investors multiply their money several times over.
2. We live in an era of bubbles, and reporters want to prick them. The rhetoric of stock advisers for a decade held that whatever the market said an asset was worth was its value. That turned out to be nonsense—they were often bubbles that, once burst, came crashing down to the ground. And bubbles are still very much with us; Slate Group chairman Jacob Weisberg, in a story from this week's Davos meeting, quotes George Soros saying that he “can just tell” when there's a bubble in prices.
Many reporters think they can just tell—and many did say, over and over again, that there was a bubble in housing prices, and, before that, a bubble in technology stocks. Often reporters are right about this. But this leads to two unexpected results: First, seeing a bubble is not the same as making investment decisions. Soros says that when he sees a bubble, he rushes out to take advantage of it. Reporters, on the other hand, think of themselves as taking a long-term view and counsel folks to run the other way. Second, reporters—and oh, yes, I include myself—who've seen a bubble before often suspect they see them all over the place. My tendency, at least, is not to miss bubbles. It's to see too many of them. When I see Apple's stock fly up, I grow skeptical and think it has to end.
3. Reporters want to tell people something they don't know, not just repeat what they already believe. A sharply rising share price for a big company generally reflects popular admiration for the product, the brand, and the chief executive. Often that admiration is fueled by the business press. It's an odd process in which publicity begets popularity, begetting, in turn, press discussions of the hype itself.
In picking stocks, reporters like to try to insulate themselves from public perceptions about a company. Otherwise we'd just be telling people to buy shares in the companies that they think are great, right? That, however, might not be such a bad idea.
Consider this: Every year, Fortune (where I worked for a number of years) puts out an annual list of the country's “most admired” companies, chosen through a survey of folks in each industry. Rarely are any of the top companies a surprise—last year, Apple topped the list. And no wonder: The list reflects popular perception. You don't get on the most-admired list unless folks already know you and think highly of you. There have been some massive clunkers on the list—Enron was a most-admired regular, and Bear Stearns was the No. 2 ranked securities firm as recently as 2007.
But guess what? It turns out that the most-admired list may not be a bad way of picking companies in which to invest. One study by Pomona College economics professor Jeff Anderson and student Gary Smith analyzing the returns showed the companies on the most-admired list did significantly better than the S&P 500 (you can see a PDF of the study here). Compare this to Fortune's top 10 investment picks for 2009: None has been a blockbuster, and six of the 10 have actually underperformed the index.
4. Finding innovative ideas isn't the same as picking stocks. Yes, in 2006, even I thought that Apple was great company. But it's very hard to guess how long a string of innovative ideas will continue. Apple itself was on the ropes for a long time. Other once-great innovators, such as Polaroid, are no longer around.
Even harder is quantifying the effects of innovation. What will be the effect of a new product on a company's bottom line? That most often lies beyond what reporters write. Reporters who write about technology are rarely willing to turn that into stock picking, because telling folks what's a great idea and what will be a profitable one are quite different endeavors. The impulse of reporters who write about ideas is to talk about the value of the ideas, not guess at how much money they will bring in.
And now about that iPad: All of this finally brings us back to this week's announcement. Do I love the iPad? I don't. I agree with most of the criticisms that have already been leveled at it. I'm surprised it doesn't have a camera for video calling—something Apple pioneered in its laptops. I think the lack of ability to use several programs at once is crippling. The screen is, to my taste, way too small to watch movies on. And the device is too expensive to toss to the kids in the back of the car for a long road trip.
Does that mean I'm telling you not to buy shares in Apple? Oh no, I'm not. Not at all. I've learned my lesson on this one, and if you want Apple advice, go somewhere else. So I don't love the iPad. That tells you nothing about investing in Apple. Nothing at all. Except that maybe, given my track record, Apple will sell a billion iPads in the next five years.