Yet when stocks move in a big way, this goes out the window; certainly there must be a cause, and the media won’t sleep until they find something to tie the movement to. Apple (AAPL) stock fell more than 6% on Wednesday, requiring the press and the analyst community to line up one by one and answer “why.” Here are just a few of the explanations (from Reuters, the Wall Street Journal, CNN Money, Forbes, and others):
Tablet competition – analyst citing “increasing competition in the tablet market”
Margin requirements – “Others cited reports of higher margin requirements at clearing firms”
Capital gains tax rates in 2013 – “several investors said uncertain tax rates on capital gains in 2013 prompted selling”
No special dividend – “some investors who were hoping for a special dividend this year may be disappointed as time is running out.”
Nokia deal in China – “Nokia is to partner with China Mobile, the world's biggest mobile operator, in a sales deal that will give the Finnish company an opportunity to win back Chinese market share from Apple's iPhone.”
Negative technical developments – “Apple’s slide also may be the result of traders predicting a drop after the stock failed to sustain a recent rally, a “classic technical breakdown,” according to Gene Munster, an analyst with Piper Jaffray”
Hurricane Sandy – “Q4 smartphone sales could take a hit from the super storm”
As you can see, there’s no lack of explanation for why the sell-off happened; per usual, when a stock makes a big move, the press and the analysts will be there to quickly tell you why. I find this laughable: Half of the items on this list were known about well before Wednesday, and the others are hardly justification for a $35 billion decline in market value.
As you may have guessed, I don’t have the slightest clue why any stock does what it does from day to day, nor do I believe having a good answer as to why it goes one way or the other entirely explains the movement (just like I can’t explain most 0.5% moves, a move up or down 5% may be due to many other forces than the one currently at top of mind); however, I think there’s one major implication from this nonsense that shouldn’t be overlooked by long term investors:
It’s hard to think long term when you’re paid to do otherwise – As I’ve noted in the past, analysts have a much different goal than long-term investors; as most research reports explicitly explain in the footnotes, analyst generally set price targets twelve months out. When looking over that short of a time period, beating or missing by a penny is life or death. When research outfits target such goals, they will attract clients who are equally short sighted; and when “I don’t know” becomes an unacceptable answer, you start getting explanations like the ones listed above. This is something you shouldn’t take lightly; it’s not a stretch to believe that reading analyst reports can negatively impact one’s ability to stay focused on what matters rather than short-term movements in the stock or in quarterly earnings.
Like most analyst discussions, there is little mention of anything related to the sustainability of Apple’s competitive position in the industry – despite the fact that this is the critical question any owner should be asking. Competition from Android (GOOG) has been present, and will continue to be; Microsoft (MSFT) is coming to market with a differentiated offering, OEM partners, and billions of dollars as well. This was true three months ago with the stock above $700, and remains true with the stock around $540 (why is this only a concern when the stock starts dropping?). If you can’t answer this question, then you really need to ask yourself what you think the future holds as competition strives to unseat the undistributed leader (in terms of profitability) in both mobile and tablets.
This is the real question. If you have a suitable answer, more power to you: The $35 billion drop in market cap - nearly equal to the market cap of Target (TGT) - from a combination of Hurricane Sandy, tax rates, and other nonsense, may provide just the opportunity you’ve been looking for to become a minority owner of Apple Inc.
About the author:
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.