I recently read “Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger.” My favorite passage is Charlie’s theoretical exercise of growing Coca-Cola (KO, Financial) into a $2 trillion company by 2034. Charlie’s best insights relate to psychology. He stresses the need for Coke to have universal appeal by removing unpleasant aftertastes, concocting a blend of sugar and caffeine for addictive qualities, and keeping the drink cold so customers can consume voraciously. He also heavily emphasizes spending large sums of money on advertising by associating Coke with happiness.
It made me think of Apple (AAPL, Financial). Today, no other company beats Apple at maximizing profit by focusing on human psychology. People buy Apple products because it make them happy. Whether the company’s products deliver real marginal productivity is irrelevant. Psychology is what matters.
Apple’s main revenue driver, the smartphone, occupies a place in people’s lives unlike any other device in the history of humankind, so it should not be compared to any other device. I’ve heard people attempt to draw parallels between Apple and Microsoft (MSFT, Financial) or Sony (SNE, Financial). I believe Coke is a better, although not perfect, analogy. Let’s be clear, no other consumer device including the PC or Walkman has had anywhere near the stickiness of the iPhone. People are near their smartphones literally 24/7 and use it up to 12 hours per day. Think about how ingrained the smartphone is. You use it for:
- Waking up
- Entertainment (news, videos, music, games, etc.)
- Work (calls, calendar, appointments, video conference, etc.)
- Contacting friends and family (text, call, facetime, etc.)
- Taking pictures and videos
- Social Media
- Sharing private moments with closed circles
- Promoting random stuff to the world
- Meeting new people
- Tweets, Instagrams, Snapchats, etc.
- Ordering food
- Personal finances (pay, trade stocks, deposit checks, check balances, etc)
- Online classes
- and more…
Countless debates with friends
I was an Apple skeptic for a long time. I don’t own any Apple products. However, I couldn’t argue against what my eyes witnessed at packed Apple stores, at sporting events, at the airport. Apple users love their company. As a result, I’ve been long AAPL since the end of 2012.
I understand the bear arguments. My Android-loving friends point to Samsung and Xiaomi as reasons for Apple’s inevitable revenue collapse. In their mind, iPhone owners are going to magically wake up one day and realize that they’ve been bamboozled into buying an inferior value. One of these friends owns a Lexus. I asked him why he didn’t buy a Camry instead. Sensing where I was taking the conversation, he trailed off and muttered something about his wife. The point is Apple is an aspirational product, especially in other parts of the world. Charlie Munger reminds us of the basic human motivation of “monkey see, monkey do” or more technically, social proof. Cars come in many flavors to exhibit status. For smartphones, there is no social proof above Apple and no other smartphone company will ever top Apple’s stature. I make this claim because other smartphone companies can’t compete with Apple’s marketing. Like Coke, it took many years and billions of advertising dollars to develop Apple’s brand image and earn a place in consumers’ hearts. Apple has cultivated an innovative and hip image throughout its history from the 1984 commercial, to the “Think Different” campaign, to the dancing silhouettes with white earbuds, to the present day Apple music commercials. What words, images, and emotions would you associate with other smartphone manufacturers, Samsung, LG, Motorola, HTC, Nokia (NOK), Blackberry (BBRY), etc? A number of these companies have paid celebrities to endorse their products only to be embarrassed when those celebrities use Apple products in public.
Apple customers are extremely rational
If people are willing to pay tens of thousands of dollars more for expensive cars, then paying a couple hundred more for an iPhone is an afterthought. For a device that gets up to 12 hours of use per day and for the amount of utility it provides, there isn’t a better purchase an Apple fan can make to maximize happiness. The social proof is that the average person can buy and emulate the richest CEO’s or the most famous movie stars. If there is one luxury item for somebody to splurge upon, nothing makes more sense than a smartphone.
More mindshare than Coke
In my estimation, Apple’s influence starts at the age of 2 or 3. How many parents have you witnessed pacify crying babies with a smart device? Since Apple is the only computing company with an emotive brand image, it is the main beneficiary of acquiring young fans. For children watching cartoons or playing Candy Crush on an iPhone, it becomes a dopamine inducing, addictive pastime. How many kids have you witnessed throwing a fit when a smart device is taken away?
Then, there are the tech illiterate aunts, uncles, and grandparents who use Apple Facetime. Every joyful moment that is shared between people over Apple Facetime is another association of happiness with the Apple brand. Try to convince these people to switch from Apple. The question “Can I just press a button and see my daughter and grand child?” might come up.
“Well, if you use Android, you would need to do a little bit of set up.” Tech illiterate people then point out that they can go to the Apple store and get their problems fixed.
Marketing 101 starts with the concepts of Product, Place, Promotion, and Price. From the hardware and ecosystem (Product), to the stores (Place and Promotion), and to the brand image, product designs, and commercials (Promotion), Apple’s competitors don’t stack up. Apple has a relentless attention to detail to tap into human psychology. Examples include the speed at which the screen scrolls through your music list and the bounce when you reach the end of your list, to LED Indicator lights that blink at the rhythm of human breathing, to the feel of the keyboard clicking, and etc. Price is the one dimension where other smartphone makers top Apple.
Not a perfect stock
Despite my confidence in Apple’s competitive advantages, one can’t dismiss the law of large numbers or operational risk. Twelve month trailing revenue is over $224B. That’s a mind-boggling number. When you consider that the world’s population is ~7.35B people, it’s like Apple taxed every man, woman and child on this planet $30 over the last 12 months! Of course, that’s not the appropriate way to look at it because most of the world’s population can’t afford Apple products and only ~40% of the world has internet connectivity. The only two ways for Apple to grow revenues is to sell to more people or to increase revenue per existing user. Investors have to be aware of saturation risk and be realistic that growth isn’t forever. No stock chart rises in a straight line to the upper right. There will be ups and downs based on economic cycles. There will be quarters where Apple executes poorly and competitors capitalize and vice versa. Not every product launch will be perfect (Apple Watch, Apple Music).
Charlie Munger coined another phrase, “Sit on your ass investing.” His philosophy is that you shouldn’t buy a stock unless you’re willing to hold it for 10 years. Apple’s current valuation is within a reasonable range. It trades at a lower multiple than the S&P 500 because of legitimate challenges. The company has more opportunity in the corporate domain and the 60% of the world without internet will eventually come online. If Apple executes poorly, I take solace that impatient shareholders, activist investors, and consumers will have a line of candidates circling its massive headquarters clamoring to replace Tim Cook. Not many jobs in the world are more prestigious than being Apple’s CEO. I’m willing to sit on my butt and wait for Apple stock to appreciate because ultimately its competitive advantage results from an exemplary marketing heritage and a mastery of consumer psychology.