Money & Markets: Technology stocks drive the market
Engineers and technologists know that tech stocks make a good addition to an investment portfolio. Apple’s meteoric rise is a good example.
Outside the institutional activities in the market, the bulk of private investors that buy and sell shares are men – old men. There is only one other noticeable cohort that stands out: technologists. It’s for an intersection of reasons, the main ones being that such people are well paid, and they love technology companies, which are the doyen of the stock market. The question of which came first, the technologist investors or the rolling tech bubbles, is answered by the observation that the stock market has always been driven by technology.
Ever since coffee stimulated the stock market into existence, it has been technological breakthroughs that have fed back into driving spiralling prices. Early on, it was basic innovations like ships, canals and railways. At the beginning of the last century it was cars, radio, electronics then computing and so on into the internet dotcom world, and then onwards in the web 2.0 bubble, and the rise of Apple.
Apple floated on 12/12/1980, a convenient date for US and UK readers as they can both agree on the numbering order. Apple stock has been listed for 40 years. It is an exemplary lesson in investing.
One share at $22 of Apple at flotation time (and it wasn’t a cheap IPO valuation as you should be able to assume) would now be worth $33,000 at this September’s high. So, if you had bought a couple of thousand dollars of Apple on flotation and hadn’t sold them, you’d be holding about $3m of shares.
This is an example of the least bad advice you can have as a novice investor: buy a stock you absolutely love, then hold it forever.
What doesn’t work out so well is that if you bought $2,000 of Apple, it would have been impossible to hold it for 40 years. I suppose it’s not impossible if you have been put into an induced coma, or have been incarcerated as an infamous serial killer, but it is beyond all human discipline to watch $2,000 go to $20,000, go to $200,000 without selling and buying a new car, repaying a mortgage, settling that divorce, flipping it into the next Apple that didn’t turn into that new, big thing.
What happens with buy and hold is that a portfolio shrinks in relevant constituents. Some companies get bought, some go bust or as close to bust as can be, while others chug along, going nowhere.
Meanwhile, one or two shares will go to the moon and make the overall returns look OK. Picking an Apple or Amazon lottery ticket is sheer luck, or at least it is if you did not do it. It is, of course, pure skill if you did buy in.
There are lots of lessons to be learned from the meteoric rise of Apple. As a side note, don’t meteors crash to earth? Well, Apple did just that. While it may have become a trillion-dollar company, it nearly went bust in 1997-1998, hitting 11c a share if you adjust it for its splits, barely 1c higher than its flotation price almost 20 years before.
Even at the height of the dotcom boom, it was only $1.2 a share. Just over 10 years ago it was only just over $3 a share. That would amount to a 3,000 per cent profit. Seeing your Apple profit halve during the financial crisis of 2007-2008 and having sat through 20 years of no returns – unless you forgot you had the stock in the first place – it would seem highly unlikely an IPO buyer would still be clinging on. If that was not enough, then followed one of the most incredible rises of a share in history, and for that matter, the most incredible rise of a stock market ever. If you had been singed by the dotcom bust, you would have bailed out at any one of several points, of which four would have seen huge temporary losses whack the patient holder.
Finally, let’s imagine you had bought those hundred shares in Apple, now worth $3 million. You are a median pensioner with their $10,000 pension income, let’s triple that, $30,000 income. Are you going to sell Apple now? Well, if you were insane enough to still be holding Apple for all these years, then the answer might be yes. When you pop your clogs and the tax man has chomped on the profits, your grandchildren can still go out and immediately buy new ‘Beemers’ with the money.
So, the answer to investing is not to buy and hold forever, because ultimately that’s advising investors to buy lottery tickets, which logic says may never get cashed in. Instead, build a portfolio of great companies when you feel they are cheap and sell them when you believe they’re expensive and keep slowly cranking that handle. Over time, investors get very good at it and if by good fortune you can bring in a 25 per cent yearly return – which it has to be said, even though it sounds doable, it’s very difficult – in 40 years, that $2,000 turns into $12 million.
As Apple stock hits 40 years old, to me it seems the chances (without the help of hyperinflation) of its stock going up 1,000 times seems impossible, just as many of its price milestones did to me in the last decade or so. Meanwhile, the chances of a smart engineer building up a portfolio worth millions seems very achievable if they apply their hard work, intelligence and discipline beyond their work and into investing.
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