I’ve not talked much about stock picking so far. This is partly because I have no expertise in picking stocks, which explains why I prefer a ‘boring’ diversification strategy to active stock selection. Over the years, diversification has served me well as a risk management tool. It has certainly relieved me of the pressure of constantly trying to find winning stocks like those of Apple or Amazon. Of course, by not picking stocks, I miss out the highs and honestly, I do feel stupid when friends tell me that this or that stock they bought beat the market hands down.
By and large, I’ve come to terms with such scintillating stories, reasoning that luck may have a big part to play in their out-sized returns; after all, how many Warren Buffetts or Jim Simons do we know? Perseverance in the face of losses is crucial too. What is the use of saying that you have the foresight but lack the temperament to ride through the volatility? Runaway successes always look easier on hindsight.
Back to stock picking, to see the immense challenge of being a great stock picker, consider the story of Apple, surely one of the great success stories in modern times. Indeed, Apple is good example of a baby boomer’s retirement dream come true if he or she had:
(a) the good luck to have gotten the shares at IPO at a split-adjusted of 40 US cents
(b) the foresight that Apple back then would transform into the tech giant it is today
(c) the guts to ride through rough patches in Apple’s stock price.
The story goes back to December 1980 when Apple went public, raising about $100 million by selling its stock for US$22 a piece (40 cents after adjusting for stock splits). By June 1983, the stock price has almost doubled. It then tumbled to 46 cents the following year, foreshadowing more bad news to come.
In September 1985, Steve Jobs, then Apple’s VP and General Manager for the Mac department dropped a bombshell by leaving the company after months of tension between him and CEO John Scully. According to informed sources, Jobs spent the year in a midlife crisis, deciding what he wanted to do with his life and flirting with all kinds of possibilities from entering politics to becoming an astronaut. Jobs eventually founded Pixar Animations and computer firm NEXT, which produced a computer that was impressively powerful but too pricey for the market.
Over at Apple, things didn’t get much better after Jobs left. The company went through three CEOs, made a raft of business mistakes such as licensing its operating system and making computers that fell further and further behind Microsoft’s Windows machines. An investor who held Apple’s stock from IPO through 1996 would would have pocketed $1.66 for every dollar invested. The annual compound return over this period? A paltry 3.2% or barely above the risk-free rate. Meanwhile, over the same period, the market (the S&P 500 index) multiplied more than five times.
Jobs made a spectacular comeback to Apple in July 1997 and was its CEO until his death in 2011. This was the defining period of Apple’s glory. First came the iMAC (in 1998), then the iPod in the fall of 2001 and the first iPhone in June 2007. The rest, as they say is history. From June 1996 to December 2017, Apple’s stock was up 300 times versus 3 times for the S&P 500. In terms of average annual compounded return, it was 31% versus 5.4%.
Many questions swirled in my mind as I recounted the history of Apple:
- Who had the tenacity to hold on to Apple’s share after Jobs resigned?
- Who had the foresight to know that Jobs will return to Apple and make it great?
- Who figured out that the US$150 million that Microsoft invested in Apple in 1997 in exchange for Apple dropping a long-running lawsuit which alleged Microsoft copied the look and feel of the Mac OS for Windows, would be the lifeline that would breathe new life into a struggling Silicon Valley firm?
- Who had the guts to keep Apple’s stock after the carnage following the bursting of the tech stock bubble burst in 2000?
- Who could have foreseen that the design of every Apple product will be the company’s great calling card?
Nobody – that’s who.
I doubt anyone had the foresight to see through the fog before Apple achieved greatness. Gary Kasparov, considered one of the greatest chess grand players of all time, said he could only look three to five moves ahead in a typical game . Predicting the trajectory of a stock is infinitely more difficult than predicting your chess opponent’s moves (stock investment is a game a million opponents!)
As I mentioned earlier, foresight is not enough for financial success; you need to overcome the primal emotion of fear and loss-aversion. Without perseverance, it is easy to throw in the towel. How many lucky Apple IPO investors held on to their investment after Jobs left the company? How many after the management turmoil that followed? I doubt there are more than a handful of such intrepid investors. The following chart provides a partial explanation.
This chart shows that the average holding period of US investors has fallen sharply from a peak of 8 years in 1950 to less than 2 years over the last three decades. Investors in other markets for which there is data show a broadly similar trend. So, investors everywhere are becoming more impatient. Which raises the question: how does one reap Apple-like returns when our holding period is just 2 years?
The story of Apple is exhilarating but not unique. The stocks of many other firms go through periods of famine and feasts. The lesson here is not that nobody held the stock long enough to prosper from it, but that such an investor is luckier and more patient than the rest of us.
1. Kasparov, G.K., and M. Greengard (2007), How Life Imitates Chess: Making the Right Moves from the Board to the Boardroom, NY: Bloomsbury.