You might have heard of Apple (NASDAQ: AAPL).
It’s kind of a big deal.
Makes computers and phones, apparently.
Sports a lazy US$2 trillion market capitalisation, making it the first US company to reach that mark and, by dint of that achievement, the most highly valued company on the US exchanges.
(If you’re wondering, the Saudi-owned oil company, Aramco, has the highest market cap in the world.)
Those numbers are impressive. But I want to give you another one.
And a bigger one:
That’s the extra ‘value’ that’s been created in Apple shares over just — get this — the last 20 or so trading days.
That’s 4 CBAs.
Almost 4 CSLs.
And remember, that’s not Apple’s total value… just the increase in market cap since this time last month.
The increase in value is almost exactly equal to the entire market cap of Berkshire Hathaway — the investment conglomerate that Warren Buffett has spent a lifetime creating (and I own shares, for the record).
And in a nice twist, Apple is Berkshire’s largest public company holding.
In a month?
For a well-known company that was already the largest on the US markets?
It’s hard to find a good, brand new reason for such a jump.
Yes, it released earnings on July 31. So that’s something.
Instead, here’s what I think it happening:
Either Apple shareholders are correcting a past mistake… or making one.
If this was a small, underfollowed company, 32% might make sense.
If it announced it was getting into some previously unknown new (and large!) business line, I could understand it.
But this is Apple.
It’s not exactly an ‘under the radar’ small cap that no-one knows about!
Which brings me back to the ‘mistakes’.
If shares of a company of Apple’s size and profile gain that much in that short a timeframe, one of two things is taking place.
If you’re in the ‘correcting a mistake’ camp, the share price gains are the market belatedly releasing that Apple is a much better business than it had given it credit for, and with a longer, stronger growth path ahead of it.
Realising the error, the market is repricing its expectations for a brighter future.
And that would be sensible.
But equally sensible is the ’making a mistake’ hypothesis. In this case, investors — perhaps due to a lack of decent alternatives in a COVID-impacted world — are just jumping on ‘certainty’ and/or ‘quality’. Where the ‘safe stocks’ used to be banks and oil companies, they’re quickly being supplanted by big, well known, consumer-tech stocks.
And that thesis is fine, as far as it goes, but paying too much, even for the highest quality businesses, can hurt your returns. In the wake of the dot.com boom, for example, Microsoft shares spent the best part of 15 years going nowhere.
Let me illustrate.
Apple now sells on a P/E of 38.
A month ago, it was 29.
A year ago it was less than 20.
But profits haven’t doubled.
So either the shares were cheap, back then, and the market is correcting that mistake…
… or they’re expensive now, and the market is making one.
If shares were up 5, 10 or even 15%, and over a longer timeframe, you could explain it away as the slow ratcheting up of future potential, as a company progressively increases profits.
But — again, and for the last time — 32%?
It is true we’re living in strange, largely unprecedented times.
But investors need to make sure they understand the businesses they own, and what they’re worth.
And other businesses have been left for dead.
Knowing the difference between sentiment and value is imperative.
As Warren Buffett’s mentor, Ben Graham, reminds us:
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Whether your shares are up or down by large amounts, it’s vital that you don’t get carried away by exuberance or despair; and don’t let the market tell you what to think!