Apple share-price-off-a-cliff: Told you that would happen
Don't tell Oracle, but you can be too rich and too thin
I was allowed to write this piece because in November I wrote to our glorious editor after a London Quant's Group seminar to say that the price of Apple shares would tank sooner rather than later.
As you all know, that’s just what happened - from just shy of $800 to the mid $400s. The reason I don’t make all that much money out of that is the economics were inevitable but the timing was viciously hard to call.
The Free Cash Problem
It tells you something about economists that this is what it’s called.
Both history and game theory tell us that cash piles will inevitably be squandered, often doing more harm than good. But if the Powerpoints that senior people at your firm confuse with actually managing are saying “We can do more with less”, you’ll be rightly sceptical of the idea that more money will make you less efficient.
Imagine for a second that Apple is the best tech firm on the planet. Certainly that is what some people tell me. Why would you think that is good for the share price ?
It’s no secret that fondleslabs are selling well and by the time you read this the wrist Jobs may be on offer. Shares only outperform the market if there’s good news, not olds. The share price reflects the expectations of future earnings and so being the best is not good enough when you come to deal with the dangers of success.
Money is a harsh Mistress
As an IT pro you have to make hard decisions like getting a new UPS that is actually uninterruptible this time, or an extra server to cope with traffic. I don’t know what’s better for you and I doubt you do either, at least not with 100 per cent accuracy, but you will try to make the best call and unless you work for Capita I have confidence that you will usually be right.
You can put all your options into an ordered list with paying the power bill at the top and buying me beer at the bottom. Once you get past the things you must do else the business stops, you get into a mix of what you need to do and what you’d like to do.
We’re alone here, so you can be honest with me. That huge Apple monitor you have doesn’t really up your productivity does it? This is captured in the most openly cynical academic subject, “Agency Theory”, AKA the difference between what you pay people to do and what they actually do in response to their incentives.
So as you move down the ordered list you inevitably get less bang for your buck as necessary spending evolves into good spending into nice to haves and ultimately “we’ve got to spend X by the end of the year else our budget will be cut next year.”
You could act for the good of the firm by saying “we don’t need more cash”. But in 30 years of IT I have never seen this happen. Have you?
The inevitable fact is that giving you more and more money compels you to make worse decisions and this is the important bit. No matter how good you are at deciding, more money makes your decisions dumber.
Freed of the discipline of paying urgent bills, you don’t just pocket the spare cash (usually), but it’s easier in your own mind to justify things that are sort-of useful like those really cool biometric eye scanners for the comms room or an off-site team meeting in a nice hotel with spa and reassuringly expensive bar.
This effect scales all the way to the event horizon. Exactly why does Apple or Oracle need a high status HQ building? Yes you get better staff if the working conditions are nice, but ultimately you look out of your office window, so the beauteous HQ is for the benefit of others.
Of course Apple has so much cash that a few hundred megabucks on offices won’t come close to breaking them, but a few hundred meg here, a few there and pretty soon you’re talking about real money.
Managing the Cash Pile
You probably know that the Macintosh was named after the kind of Apple, not the coat, so it follows that the hedge fund that handles a large chunk of Apple's cash is called Braeburn. Nor should it really surprise you that its performance relative to the market is rather less than stellar. As any Quant will tell you, the only consistent performance of fund managers is under-performance, a fact borne out by a lot of research as well as personal experience.
Until it peaked, the share price of Apple meant that almost any other investment would have a lower return so cash actually acts as a drag. So unless you believe that Apple has an unlimited number of high return investments the return as a percentage of the assets must go down as the cash pile increases.
Of course you can get more investment returns by taking on more risk. For instance at the start of the year those nice safe banks in Cyprus were offering good returns, however just like in Iceland that did not turn out well and that's before we enter the choppy waters of Madoff-scale scams which conned high end professionals as well as ordinary decent folk.