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Comment by freedomben | Hacker News Reader

I think the bears are vastly underestimating the size and power of the moat (or garden wall) that Apple has built. Apple's brand loyalty is ludicrously high, but even the people who don't care that much about the brand are way more trapped in the ecosystem than most people realize. Seeing a heavy Apple user try switching to Linux on their laptop was a real eye opener for me.

I'm bullish on Apple stock because they could afford to go a very long time without huge wins, and still be wildly powerful and in control of the tech lives of a huge percentage of the population. Apple also iterates and polishes over time until it's the best, and they have plenty of time. Going bearish on Apple is a bad move IMHO.

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What you said (if true) makes Apple a great business. And your reasonable arguments make a good case for that.

But does it make a good investment? A good investment is investing in a great business at a reasonable price. If the price is unreasonably high, then even a great business makes for a bad investment.

The thing about Berkshire is that they're so big that they can either buy pieces of huge companies like Apple, all of which have high valuations, or they can sit on the cash. Nothing else moves the needle for them - an amazing multi-million dollar business would be 0.0.. % of their portfolio.

> But does it make a good investment? A good investment is investing in a great business at a reasonable price. If the price is unreasonably high, then even a great business makes for a bad investment.

This depends on whether you are thinking short-term or long-term. Short-term, I don't know because at this point I'm exclusively a long-term investor (something I might should have mentioned in my original comment).

The current price (for a company as big and mature as Apple) is essentially a gauge of how bullish vs bearish big investors are feeling about the sector and the specific company. It may fluctuate up and down a little bit based on news and such, but long-term I expect it to do well.

Easy intro-to-equities case:

- historical long-term PE ratio is 15

- lets bump it to 20

- lets bump it again to 25

- Apple is at 33

- either it grows gross profits (33/25) 32%, or its worth 32% less than it is now.

- revenue has been flat since late 2021

- gross profits have been flat since late 2021 and approximate ceiling of 27% achieved in 2012

- if we skip just one unprincipled bump, we're looking at 65% increase required in gross profits.

- "long term investor" is handwaving, not a virtue, thesis, or principle. it doesn't mean anything here other than "I strongly believe Apple can double sales while maintaining or growing profit margin" or "can the timeline be longer please? because on a long enough timeline I'll be right"

It absolutely is a gamble if Apple could grow again like it did when it grew from 55-60bn USD in 2018-2020 to a company earning 90-95bn USD in 2021 to 2023.

On the other hand few companies could have achieved such growth and it seems better to go with winners.

I understand this is an "intro-to-equities" case but doesn't this completely ignore dividends and buybacks?

I'm not an expert at reading financial statements but it seems to me Apple could easily double their dividends and still be very profitable relative to other companies.

Surely moves like that should have some effect on stock price meaning there are more possibilities than "grow gross profits" or "worth less"

No. PE (price to earnings ratio) is the ratio of price to profit. Assuming they do not grow, their profit is stable at the latest reported value indefinitely, and that their accounted profit is a good approximation of distributable cash (that is the approximate goal of how profit is to be accounted), then the inverse of the PE is the maximum return on investment at this instant. That is all of their earnings paid out as returns.

Apple has a PE of ~34, so that is ~3%. 30 year treasury bonds are averaging ~4% right now. So yeah, Apple would be a abysmal long term investment if you assume they do not continue to grow. Anything with a PE over 25 at this time must grow to be worth the investment.

This is a good Q, I didn't know the view in the other reply, at least specifically. In general I know profit : stock price is necessary for calculating rate of return.

my dumber answer is "only if dividends and buybacks exceed profit sustainably", which is an oxymoron eschewing extreme circumstances (taking on debt at that you won't pay back, or being offered debt at 0% interest despite the fact you're giving it away)

There's lots from there (ex. couldn't we pull that off? Bank doesn't know we're liquidating if we don't tell them) -- in general the abstraction finance uses is "is the rate of return higher than bonds?", which of course is true in the short run in this extreme of a scenario, but unlikely in the long run

Investment is about growth; Apple is already huge. When you've already cornered your respective market niches and you have big competitors it's hard to grow more. That said I think there are less reliable investments, so Apple's probably fine.

Investment is actually about returns. Growth is a means of getting returns, but not the only way. A large, stable, profitable company with no growth prospects is not a poor investment if they pay out returns.

Doesn't have to be. A non-growning company that is yielding high profit can still be worth a large amount of money.

Indeed. As profitable companies get big and struggle more with growth, they can do stock buybacks, or pay out dividends. Plenty of stocks have held strong with small growth % but non-trivial dividends. I agree, when talking about companies this size, it isn't all about growth.

Presumably Apple has enough cash on hand so that it could "pay back" its current shareholders by big (relatively speaking) dividends and even stock buy-backs, but not sure how much that influences the buy/sell decisions of retail/small stock-exchange investors.

Long term or short term doesn’t change that question at all.

Sure it does. It doesn't mean it's impossible for long-term to be overpriced, but it is definitely a lot less likely to be significant/impactful, and if it is overpriced and experiences a correction, you're much more likely to be able to ride it out and average into a reasonable position over time. With long term you're looking for several % growth per year, over multiple years. With long term you're much less sensitive to overpricing. Short term on the other hand carries significant risk of overpricing, because you're concerned about tiny % changes over short periods of time. With volatility/risk, the length makes a big difference.

What you are writing is valid for investing in broad market index funds, but not for investing in individual businesses.

Warren Buffet's goals are not the same as those of someone who wants to maximize long term returns while also minimizing time and effort spent evaluating investment options.

Not really. It may look that way if all you see is historical averages (and you dollar cost average) but there are definitely times when buying will screw you indefinitely compared to not.

Valuation absolutely matters, and buying when something is overvalued can irrevocably screw you over.

And that is on a broad market basis - individual companies can just flat out go bankrupt and cease to exist.

If you bought in ‘72 or ‘99 for instance, it was a very, very long time before you’d even be able to cash out neutral.

> If you bought in ‘72 or ‘99 for instance, it was a very, very long time before you’d even be able to cash out neutral.

Agreed, but I would consider those different companies (particularly in '72). When dealing with a small or medium company, the approach is very different and I would very much agree regarding risk of overpriced. However at this point Apple is very blue chip and very different than their startup or almost bankrupt earlier versions of themselves. If Apple were a startup or side-company in the tech industry, I'd have a very different opinion regarding whether they are over-priced or not, and how much risk that would carry.

It sounds like you’re just trying to convince yourself that Apple can only ever go up and to the right - forever?

Which hey, maybe. But that is exceptionally rare in practice.

That's quite an extreme strawman. I never said that, and I doubt anybody reasonable would agree with that statement.

If it makes you feel better to assume anyone with a different opinion than you must be an unreasonable and uninformed idiot, then by all means go ahead thinking that, but I have little interest in engaging in a bad faith conversation.

Speaking of bad faith conversations…

Yea this guy doesn’t understand how returns work at all.

What he described makes it both long term and short term a bad investment. But he seems uneasy what “buying at peak” is.

You're making the classic mistake that thinking a company makes a good product they're a good stock. If the stock has sky high expectations and the company does "only" very good, the stock might still fall.

> You're making the classic mistake that thinking a company makes a good product they're a good stock. If the stock has sky high expectations and the company does "only" very good, the stock might still fall.

Disagree with the first sentence, fully agree with the last. My read/feel on expectations right now is that Apple has generally lower expectations from institutional investors than what is warranted, certainly from Berkshire. Berkshire certainly isn't bailing, but there's clear indications that Apple isn't expected to be the rocket ship they previously thought it would be.

I don't think Berkshire is particularly bearish on Apple. It's just they made good money out of the investment and it's a good time to cash out and keep cash for future buys. The fact that they kept half of it tells you they still consider it a solid position but if there's a downturn ahead, having cash on hand to buy other companies makes sense.

Exactly, this is a rebalancing since Apple because a huge portion of Berkshire's portfolio due to it's growth. They became over 40% of Berkshire's holdings, too much for them to be comfortable with.

Right. This is as much about Berkshire's portfolio, investment philosophy and portfolio balance as it is about Apple. Probably more the former than the latter.

Indeed great moat and brand loyalty but a big question is how much can they grow now that they’re so massive

I don’t think this has anything to do with apple. It’s about getting out before a likely market crash, that will inevitably lower the value of almost all companies.

The only risk here for buffet is the fed coming in with a huge rate cut or just suggesting it, or restarting QE in light of a market crash, which will give stock markets an insane boost (including apple)

Are they putting their cash into gold or similar then? A market crash will also coincide with the US dollar crash, no? Or is a market crash separate from the US dollar failing?

A bubble burst or similar doesn't have to crash the whole economy. It definitely can, especially when it's stuff like financial or real estate. A tech bubble burst would devalue many of the highest valued stocks but doesn't have to take the entire USD down with it.

That being said, I haven't studied economics and am very much a layman. So if someone wanna correct me, please do!

There's even a precedent. https://en.wikipedia.org/wiki/Dot-com_bubble

Sucked for California. Everywhere else was fine. But traffic was so much better in the bay so there's that silver lining...

They are not necessarily correlated - but often can be.

[https://www.fidelity.com/learning-center/trading-investing/s....]

If Berkshire Hathaway sells 1 million shares of AAPL for N dollars per share, and the market drops the price to .8 * N dollars per share, he just buys more shares back with those same dollars, for example.

It would be a very Buffett thing to do, because shares produce dividends per share, so increasing share count is its own strategy.

> Seeing a heavy Apple user try switching to Linux on their laptop was a real eye opener for me.

I’ve been using Linux since 1996 and Linux on the desktop has been and continues to be a disaster. It’s only good for two things, opening a terminal or a web browser.

"Opening a web browser" is nearly sufficient for most users though. So much so that Google based an entire OS around it.

I don't think he's necessarily bearish on Apple. Buffett could feel like the entire market is overvalued like in 2001. Even Microsoft fell for a few years with great profits.

Thanks, that's very fair. Berkshire still has a pretty huge stake, which they wouldn't be holding if they were bearish.

Funds like this don’t think one way. They can be bearish, cash out while hedging

Also fair point. Berkshire has such a significant impact on the market that they have to take a long-term approach just to changing their stake, lest they sway the market. I've never been involved with a big firm like this, but I would also imagine there's some regulation involved around what/how they're able to operate, so that could also be a non-trivial factor in their decisions and current positions.

Everything you say can (and probably is) true, but the company can still be vasstly overvalued on a P/E basis.

Serious Question: What happens to stocks in wartime? And in the next BigWar - a large % of it will be comms related. What happens to telco/handset-providers stocks if they become useless during major warfare?

Agreed. Apple has a lock on consumers similar to Microsoft in the business market. They may or may not be producing the best products, but switching ecosystems is phenomenally painful.

In ~2009 Apple lost 50% of its value—despite previously introducing a world changing product and having billions in the bank. Macro trends affect everyone and premium stocks often get hit hardest.

Yes, but that describes most other stocks too. 2008/2009 was a general blood bath. No matter where your money was (in the stock market) it took a beating.

Yes, and Apple took a harder beating than usual because it was overvalued (ahead of itself) beforehand. Plausible potential future about to rhyme with the past.

Yes, in the US and Europe. But Apple lost China and many parts of the world don't have the same loyalty to them. This may put Apple's profits in jeopardy in the medium to long term.

Fair point, although from what I've heard they are experiencing great numbers in China, including achieving that important "status symbol" or "luxury brand" status that has helped make them so formidable in the US.

I also think the US and EU markets are so big that they've got time (and plenty of money) to figure out Asia and Africa.

To be fair their position in Europe is not particularly stellar either. It’s good but can’t be compared to their US stronghold.

> Seeing a heavy Apple user try switching to Linux on their laptop was a real eye opener for me.

Mac sales account for only around 8% of Apple’s revenue.

It's not just Macs though. It's the iPhone, Apple Watch, EarPods, Magic Trackpad, Home Pods, and purchased Mac apps and other digital goods that make switching to a Linux laptop especially painful.

That’s only if you use a Mac as your main driver, which is a minority. Apple makes most of their revenue from people who don’t own a Mac.

> I think the bears are vastly underestimating the size and power of the moat (or garden wall) that Apple has built.

Apple's size/moat is one thing. That will last them for years to come, in no small part because the competition is dog shit (Windows is an ad ridden hellhole that constantly enshittifies itself with each generation, and Linux, well, every year has been "the year of Linux on desktop" for like two decades now?).

But there isn't much potential for true growth in their existing product categories either, and this is IMHO why Buffett is dropping such a large stake. Western markets are pretty much saturated, India/China's population parts that can afford Apple stuff just as well, and for other markets Apple is just too high a price point. Making that worse is that the Apple Vision, the first entirely new class of product in years, has utterly and miserably flopped.

> Seeing a heavy Apple user try switching to Linux on their laptop was a real eye opener for me.

Depends which part of macOS they're mostly using... if it's mostly a web browser, Terminal and IntelliJ, VSCode or whatever, switching is relatively painless. The challenge is hardware support, and a bunch of stuff isn't supported by Asahi Linux.

> Depends which part of macOS they're mostly using... if it's mostly a web browser, Terminal and IntelliJ, VSCode or whatever, switching is relatively painless. The challenge is hardware support, and a bunch of stuff isn't supported by Asahi Linux.

For the person I saw, it wasn't the OS itself really that was the problem. For him it was the integration with his iPhone, watch, his magic trackpad, Home Pods, and some apps and other digital goods that he had purchased that became hard to consume. There weren't any hard deal breakers, but so many thousands of paper cuts that it became overwhelming (which as I understand it, is exactly the strategy Apple is pursuing).

Gotta say they handled the post jobs era well financially.

> I think the bears are vastly underestimating the size and power of the moat (or garden wall) that Apple has built.

See 'Are "Good Companies" Good Investments?' (references used in the description):

* https://www.youtube.com/watch?v=ZY_NFQNUr_k

The above is a summary of this podcast episode, 'The "Good Company is a Good Investment" Fallacy':

> It sounds reasonable to say that investing in the most popular companies would produce the best returns, but this is just not how asset pricing works. Today on the show, we unpack the ‘good company is a good investment’ fallacy. Before diving into the main topic, we kick off our discussion on the subject of index funds with Robert Wigglesworth’s Trillions. From there, we share some updates about custom indexing and home buying in Canada, along with the immense valuation of Tesla as well as Elon Musk’s net worth. This acts as a great segue into the focus of today’s show: a so-called good company has high historical returns, strong earnings growth, strong forecasted earnings growth, and high prices. But just because the good companies have done well historically, this does not mean they will continue to be a good investment. In fact, there is a premium that says that higher-priced stocks earn lower returns than lower-priced stocks and value stocks. We unpack several papers that explore the concept that it is the lesser-known companies that tend to have better returns. We also get into how growth extrapolation, the skewness effect, and the big market delusion plays into the good company is a good investment fallacy. Our discussion concludes with the idea that investors are better off paying attention to expected returns rather than falling victim to extrapolation errors. Tune in today!

* https://rationalreminder.ca/podcast/174

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