Apple Stock Analysis – Focus on Long Term Investing

  • As a Buffett fan, I like to follow what he does and try to understand why he buys what he buys.
  • When it comes to Apple, the key is that Buffett is buying the business, while most others are speculating with the stock.
  • Having a business attitude when investing in Apple, will make things easier to grasp.

The first article I wrote about apple was in April 2016, on Apple’s 40th birthday. In 2018, I wrote another on why I think Buffett has been investing in Apple (AAPL). Since then, not much has changed for the business as AAPL is still printing cash, doing buybacks, paying dividends and strengthening its moat by enlarging its ecosystem.

The recent, China related revenue warning issue is significant, as lower guidance always is, but I would argue that AAPL is still the same business as it was in 2018, when the stock was above $200 and in 2016, when the stock was below $100. The media noise surrounding AAPL makes it really difficult to remain focused on an AAPL’s investment thesis, and makes it easy to shift your focus towards speculation. As would Buffett say about living in Omaha:

I like the lack of stimulation here, we get facts here.

Being an investor, means that you look at facts; earnings, which actually didn’t fall in comparison to Q4 2017, didn’t go negative as some are saying and the company bought back approximately 8% of shares over the last 12 months.

For more information, please check my video where I share my views on Apple:

0:00 Long term focus on AAPL
3:27 Why is Buffett buying AAPL
10:00 Apple’s stock and you!
10:36 The market on AAPL
11:27 Quarterly earnings comparison
12:28 Will AAPL go bust?

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How am I investing and how much research I do?

Investing is a very important topic for all of us. However, not all of you can dedicate a lot of time to it. I do research all day long and still the time is never enough. Plus, given a Ph.D. in financial risk management, 3 years of teaching International financial accounting at university level and researching stocks, listening to conference calls and reading annual reports day in and day out, I think I have some skills that few retail, part-time investors have. That is normal for the way we live, I am sure you are much better than me at surgery if you are a surgeon, law if you are a lawyer, software if you are a engineer or in whatever your specialty is.

In the follow video I discuss what I do and how I go about investing.

For those interested in more information, please check my Stock Market Research Platform here:

https://sven-carlin-research-platform.teachable.com/p/stock-market-research-platform

How to invest in businesses with dr. Per Jenster

I recently had the privilege to interview dr. Per Jenster. He is a Fullbright scolar, author of many books, former dean of the Kopenhagen Business school, entrepreneur with more than 20 ventures of which many went public for hundreds of millions and he is an investor that has his own hedge fund. A person from whom we can learn very much. Enjoy the interview.

In case you want to reach Prof Jenster or know more about how he invests, please go to … http://nichemastersfund.com

Here is the video and you can find the discussion topics below the video.

0:27 Who is Per Jenster

1:33 What to look when investing in a business

3:59 Fund based on a niche strategy

6:01 Companies we are investing in

8:30 Management

10:00 HIGHER PE for HIGH ROIC

10:44 Index funds

13:10 Trading

14:24 Strategic focus

15:57 Current stock market

18:25 Diversification

20:31 Investing education

21:36 Modern investing

23:32 Learn to be better at investing

 

Nassim Taleb is warnings us – situation worse than in 2007

  • The US government has $21 trillion of debt, but few know and think about the $49 trillion in hidden debt.
  • The global economy is not stable because the core is cracking already, think Italy.
  • Taleb compares this debt environment with a Ponzi or Maddoff scheme.
  • The main message is to be protected (gold, real assets, puts).

In a recent Bloomberg video, Nassim Taleb, the author of Black Swan and probably one of the best estimators of risk, is warning us that the financial situation is worse than it was in 2007.

As Taleb doesn’t share much data in his interview, I have researched each of his statements and attached a few facts to them.

The topics he discusses and I dig deeper into are:

  • (0:00) Introduction
  • (1:23) The bigger debt pile that has just been transferred from housing to governments.
  • (4:16) The hidden debt few are taking into account.
  • (5:48) How the economy is already cracking in some places.
  • (6:32) The high probability of a global currency collapse.
  • (8:01) What will happen and how will it pan out? Inflation.
  • (9:36) 4 ways to protect yourself.

Enjoy the video.

ARE THE STOCK MARKET AND ECONOMY IN A BUBBLE? 7 FACTOR EXPLANATION

I recently summarized Dalio’s last book, Big DEBT CRISES and there he shares his questions, check list, to see whether the stock market or economy is in a bubble or not. In today’s article, in light of the FED’s tightening, we are going to go through his questions, to see whether we are in a bubble or not.

1 bubble questions

Source: Big Debt Crises

Good day fellow investors,

my name is Sven Carlin and I am an independent investor, independent thinker who doesn’t really like to follow the crowd, that has served me well in my life and, I have the feeling it will serve me well in the future too. Let’s go through Dalio’s questions one by one and then conclude with what to do, where Dalio’s option is to have an all-weather portfolio.

We are going to look at whether the US economy and stock market are in a bubble. As for Europe, I’ll make a special article about it due to the many economies.

  1. PRICES ARE HIGH RELATIVE TO TRADITIONAL MEASURES

The US stock market is expensive and prices are much higher than traditional measures.

2 stock market price

Source: Multpl

A look at the cyclically adjusted price to earnings ratio for the S&P 500 that takes into account 10 years of earnings, shows how stock prices were higher only during the dot-com bubble. But, let’s not focus only on stocks, let’s look at housing.

3 house price to income ratio

Source: Longtermtrends

The home price to income ratio is not higher than it was in 2007 but is getting close to it and it is much higher than it was in the past 50 years. Incomes were low in the 1950s so that isn’t really comparable.

To answer question one: yes, prices are high relative to historical measures.

2. PRICES ARE DISCOUNTING FUTURE RAPID PRICE APPRECIATION FROM THESE HIGH LEVELS

If we take a look at the S&P 500 and at S&P 500 forward expected earnings, all we can see is fast growth.

4 price and earnings

Source: FACTSET

So, huge growth is expected, S&P 500 actual earnings are at 116 points while the market expects them to be at 175 points in the next 12 months.

5 s&p 500 actual earnings

Source: Multpl

As for home prices, the huge run up in prices up to 2018 showed bubble characteristics but it has been cooling of as interest rates go up.

6 new home prices in the us

Source: FRED

So, perhaps what we have seen up to December of 2017 will again be called a bubble as higher interest rates inevitably put pressure on asset prices. Not yet on stocks as the sentiment is still strong but you can’t escape when it comes to housing.

ANSWER: YES, prices are discounting fast future price appreciation, certainly in stocks, whereas it might be over for housing.

3. THERE IS BROAD BULLISH SENTIMENT

Let’s see, Kudlow states the US economy is crushing it.

7 kudlow

Source: CNBC

While consumer confidence is close to record highs.

8 consumer confidence

Source: FRED

Answer: YES, sentiment is bullish! Even with stocks, the sentiment has been extremely greedy in 2018.

9 greed

Source: CNN

4. PURCHASES ARE BEING FINANCED BY HIGH LEVERAGE

This is not in a bubble, consumer credit is just 50% higher than where it was in 2008 and is just 10 times higher than where it was in 1980. (allow for some irony here)

10 consumer credit

Source: FRED

As for the stock market, margin debt is at historical highs. Just to mention as a comparative note, margin debt was $263 billion in February of 2010 and $314 billion in July of 2008.

11 margin debt

Source: FINRA

Answer: YES, purchases are increasingly being financed by debt.

5. BUYERS HAVE MADE EXTENDED FORWARD PURCHASES

If we look at the level of business inventories, those are 33% higher than in 2008 and I don’t think the economy grew 33% since 2008.

12 inventories

Source: FRED

Answer: a mild yes in this case.

6. NEW BUYERS HAVE ENTERED THE MARKET

Now, the percentage of Americans owning stocks didn’t really go up that much lately as millennials don’t invest that much in stocks.

13 people invested

Source: Gallup

The middle class left after 2008, typical behaviour, buying high and selling low. If we see another bump like in 2007 where the participation jumped from 61% to 65%, we will know it’s a bubble. Those aged 35 and above are investing a bit but not yet like it had been the case.

14 americans invested

Source: Gallup

However, not investing in stocks but definitely saving for a house. New buyers are rushing into the home market.

15 new mortgages

Source: Bloomberg

Answer: with stocks it is a no but with houses it is a yes. Also, it is important to note the widening wealth gap where those that have invest more and push stocks higher while those that don’t have, simply don’t have to invest.

7. STIMULATIVE MONETARY POLICY THREATENS TO INFLATE THE BUBBLE EVEN MORE (and tight policy to cause its popping)

Interest rates have been already tightening and we can expect more in December.

16 interest rate

Source: FRED

However, just take a look at historical interest rates.

17 historical interest rates

Source: FRED

On top of monetary stimulus, there is huge fiscal stimulus.

18 budged deficit

Source: FRED

On top of the already huge deficit, the deficit is expected to breach $1 trillion in 2019.

So, to summarize on the questions:

19 summary

WHAT TO DO:

Now, that depends on where you are in your life, about to retire or just starting, but in any case, an all-weather portfolio is the key as we are in the late part of the cycle.

debt dalio

Source: Big Debt Crises

We are at bubble top – so a lot of opportunities to diversify by selling what is in a bubble and buying what is in depression. In a global world you can do that today.

If you wish to check how am I building my portfolio as I cashed out of most my long investments during 2015-to 2018, the last being Nevsun – you might want to check my Stock market research platform where I am slowly building my model portfolio that should do very well in this environment.

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Ray Dalio – Big Debt Crises – Summary (video/audio)

Ray Dalio, the legendary hedge fund manager is out with a new book. After the success he achieved with his book on Principles, he has now summarized Bridgewater’s research on debt crises in a new book called Big Debt Crises.

Ray Dalio – Big Debt Crises

The book contains 48 case studies on inflationary and deflationary crises and the first 61 pages summarize the findings. I urge you to read at least the first 61 pages but if you want an intro for it and perhaps prefer listening, here is a summary:

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Mohnish Pabrai – 5 Investing Tips

What I like and admire with Pabrai is his concentrated portfolio. Sometimes, I also have stocks that make more than 50% of my portfolio. So, I always listen when Pabrai speaks. I am connected with him on Linkedin where he shared an article (connect with me if you wish, always nice to meet people) about a recent interview. In this article I’ll go through what he is saying and give my perspective on what we, value investors can learn.

The investing tips discussed are  (5 quotes used too):

  • CONCENTRATED PORTFOLIO AT A PE RATIO OF 1 OR LESS
  • 3 REASONS WHY INVESTMENTS DON’T WORK OUT (CHECK LIST)
  • CLONING STOCK INVESTMENTS
  • DON’T THINK ABOUT MACRO
  • NO INTEREST IN THE US
  • TAKE A NAP

Concentrated portfolio and PE ratios of 1

As I already mentioned, Pabrai has an extremely concentrated portfolio. He buys companies at what he calls PE ratios of 1 or less. He does that by looking at unfavourable industries, like the car industry in 2012, he finds companies that will not go bust and have potential to deliver high earnings in the future. For example, in 2012, he was buying Fiat-Chrysler (FCAU) at an average price of $4. The current EPS is $2.22. If we deduct 40% of the 2012 purchase price as the value gotten from Ferrari, we get to a PE ratio close to 1. Needless to say, FCAU’s stock is now at $17. On top of that, we have to add the Ferrari spinoff that has a market cap almost as big as FCAU. Double the gain there for Pabrai.

FCAU stock price:

FCAU STOCK PRICE

As for finding such stocks, Pabrai tells us how we have to keep our eyes open as such opportunities arise once every few years.

To quote:

What I found over a 19-20 year investing history is that these, what I call the PE of 1s, tend to show up an idea every two or three years.

The last similar opportunity he took advantage off was in Indian real estate in Mumbai. He bought 10% of the company Sunteck.

Pabrai bought Sunteck after the demonetization process hit the Indian economy:

sunteck stock

3 reasons why investments don’t work out for investors?

Pabrai discloses 3 reasons:

The single biggest reason why investments don’t work out for investors is leverage.

This is followed by misunderstanding of the comparative advantage of the moat where investors think there is one but there really isn’t. And the third reason is management. Quality management is what makes the difference between great and mediocre investments.

Cloning stock investments – Portfolio Crown Jewels of other investors

Pabrai discusses how he still hates the auto industry due to high capex, unions and consumer tastes. However, he is humble to say that the only reason he owns Fiat Chrysler is because he studied two investors he admires who had a position in General Motors. As discussed in the video here, Einhorn also opened a position in GM in 2012.

Also, he is so humble to share that he found Rain Industries because someone sent him an extremely well written report:

rain industries

Don’t think about macro

Investors should spend zero time thinking about macro anything. Just completely ignore it because it is hard enough to figure out the future of one business. In almost all cases micro will trump macro in a major way.

Here I must say I agree, the micro will trump the macro in a major way. Over the long term, good businesses will do great and that is what we have to understand. Nobody can time a recession or a bear market. However, Pabrai discloses also how he has lots of cash at the moment. This is probably not due to the macro, but because of the lack of opportunities.

No Interest in the US

The US is becoming harder and harder to invest in.

The number of stocks in the US declined from 8,000 twenty years ago to less than 3,500. Thus, a smaller number of companies and more analysts following those. This makes it difficult to find gems. Up to 5 years ago, 80% to 90% of his portfolio was in the US.

Take an afternoon nap

Usually, I take an afternoon nap on most days.

Pabrai believes you can increase your productivity by taking an afternoon nap and that even Buffett has a nap room in his office.

I always love to learn from the best investors out there, I am not taking naps, I don’t think I need them, but I spend most of my time doing research and looking for undervalued stocks. I am currently looking at the complete list of Chinese stocks traded in the US, trying to find good investments in China, where stocks are still relatively cheap. However, I am intrigued by Pabrai’s less than 1 PE ratio investing which is something possible to do when I think about it. The last time I was buying a stock at a PE ratio of 1 was Cemig (NYSE: CIG) in January of 2016.

If you want to get investing ideas and reports that come from 200 hours per month dedicated on investment research and think that 200 hours of you time is worth more $20 bucks, please check my Stock Market Research Platform. If just one research report leads you to a stock like FCAU or RAIN, you will make one of the best investments in your life. Thus clone yourself as we all have limited time by letting me do some of the work for you.

Should I Invest? It is a Positive Sum Game

Should I invest in stocks?

Investing in stocks is a positive sum game. By being careful in what you invest in, you can reap many positive returns just from how things work in this world. The economy, other people, trade and technology all work in your favor.

Stocks went up 280 times over the last 85 years. Take advantage of it.

stock market

What should I invest in?

The key is to invest in things that will do well over time no matter what. Stocks benefit from economic growth, their business earnings create your returns, and over the long term you are protected from inflation.

Why should I invest?

Except from protecting yourself from inflation, if you don’t invest, the value of your money is eaten away slowly day by day. You need $25 today to purchase what you could had bought with $1 back in 1913. On top of everything, the global economy will continue to grow and develop, stock earnings will grow and your dividends will grow.

How much should I invest?

That is personal, but even a small amount will develop a habit, which is the key for long term investing success.

What stocks should I invest in?

You can invest in mutual funds, which is a good option if you don’t want to think and look for better investment opportunities. If you are willing to put some effort, you can find better and better investments that protect your capital and give you higher returns over the long term.

Should I invest in bitcoin?

Investing in cryptocurrencies is the opposite of investing in stocks. Stocks have dividends which lead to positive returns, stocks are parts of businesses that own assets that generate profits. Those assets protect you from inflation. Cryptocurrencies like bitcoin and Ethereum only depend on whether somebody is willing to pay more for them and there is a hefty fee related to every transaction that makes it a negative sum game. This can be seen by the big swings in cryptocurrency prices, an example is the ripple price.

ripple priceWhat should I invest in 2018?

The key when investing is to create a portfolio of assets that are going to do the work for you but where you will also be diversified. This means that you should look to build your investment portfolio over time. More about that in tomorrow’s video about my portfolio.

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Here is a video about why should you invest in stocks:

 

 

The Intelligent Investor – 7 Things to Watch for the Defensive Investor

 

The Intelligent Investor by Benjamin Graham is surely the best book for stock market beginners as it gives you both the tools and the mindset to start investing safely.

We continue with our summary of it and discuss Chapter 14 – Stock Selection For the Defensive Investor where Graham gives 7 indicators to statistically approach investing that anyone can follow.

The criteria are the following:

  1. Adequate size
  2. Strong finances
  3. 20 years of dividends
  4. No earnings losses in the past 10 years
  5. 33% 10 year earnings growth
  6. Price to book not above 1.5
  7. Price to earnings not above 15

Enjoy the video where I discuss the above in more detail and explain how and why Graham approaches the above.