The Editor’s Desk: Behind the Apple-inspired market chaos

DUBLIN — Global markets had a volatile week, plunging to the depths on the back of bad news from Apple before rebounding on the Fed's reassurances. It looks like market uncertainty is back and bigger than ever, which is a scary prospect for investors used to relative calm. In this episode, Alec Hogg and Felicity Duncan dig into the Apple story and look at the reality behind the numbers. They explore why markets reacted so badly to the news and discuss what investors should do to manage anxiety in a choppy market environment. They also look ahead at what the new year holds for the JSE, asking if the pundits are right in saying that investors should stay away and look offshore. – Felicity Duncan.Hello, and welcome back to BizNews Radio. This is The Editor's Desk, I am Felicity Duncan and with me, Alec Hogg, here to discuss the news of the new year so far. Alec, the first thing we've got to talk about, of course, is the news out of Apple, which was very striking, and which sent markets really reeling in the early part of the week. The news being that they are going to miss their previously announced sales target by several billion dollars. In large part, because of the plunging sales that they've been experiencing in China but of course, there's also more to it than that. What was your reading of that announcement?.___STEADY_PAYWALL___.Well, Apple is in our BizNews' Global Portfolio so, clearly we've been watching it closely and of course, my hero, Warren Buffett, my inspiration (don't forget about that), we want people to give us their inspirations but the man who's investment ideas must be taken very seriously is a big investor now, in fact, it's the biggest share he owns in his portfolio. So, I watch Apple closely and it might seem like little if you forecast your sales are going to be $89bn, and they're coming in now at $84bn. But in fact, it's being seismic and the reason for that is it's more than a decade and a half since Apple missed its forecast. At the end of every quarter, in their quarterly engagement with analysts, Apple gives a very clear forecast of what's happening in the quarter that follows. .In other words, they will talk usually about 3 to 4 weeks into the new quarter so, they've only really got two more months of the quarter left and at that point in time they give you a forecast. That makes the analysts very happy, it's transparent and in this case the forecast was a minimum of $89bn going up to about $94bn potentially, sales in the last 3-months of 2018. Now, this week, they came out to say they'll get to about $84bn and the reason is, as you've articulated, is to do with China and upgrading of phones not going as strongly as they anticipated in the West. It is a warning flag and you've been waving this one. I remember when the iPhone X came out, you were talking about $1k for a phone being pretty excessive. Apple has continued to push the envelope. It did well in the third-quarter of last year because the revenues were a lot higher, even though the unit sales of iPhones were falling, and remember the market looks at Apple as an iPhone company now, because about two-thirds of its sales come from iPhones. So, it looks like that classic example of just pushing a little bit too hard. The price increases last year were over 20% on their products. The market is now saying, 'mm, we love you Apple but maybe we don't love you twice as much as we love the alternatives.' .Yes, it's very interesting. I think that the smartphone market is mature now. It's changed. It's evolved and like any other technology as that happens you start to see consumers get more interested in generics, right. So, if you think about something like a common appliance, like a TV or a microwave or something like that, or a refrigerator actually is a good one. When those first came out you could charge really, premium prices and people had very strong brand preferences. But then as time goes by and the technology spreads and matures suddenly the third best refrigerator is just as good as the best fridge, right. So, people then start to say, 'well, why should I be spending more?' So, there's a bit of that happening. .There's also, of course, the fact that the big markets for smartphones now are in emerging markets and Apple, for example, has a very low share in a market like India, which is so important for smartphone growth because people are just opting for the far, cheaper alternatives. Again, then of course, with the slowdown in consumer spending in China really dinging it and the one thing that I read, there was a good piece in our partner, 'The Wall Street Journal'talking about worries that Apple is falling and sort of slumping unit sales, really points to a slowdown in what has been the big innovative space. Right, smartphones, when Apple introduced the iPhone that created just a whole new economic world, right. We wouldn't have Uber, we wouldn't have so many of the companies that are big, and popular, and sexy right now – they wouldn't exist without what Apple did with the app-economy and all the rest of it. But that's also maturing and so, a bit of this is also people saying, well, if Apple is maturing, if smartphone technology is maturing where is the next boost of growth going to come from? Where do we look for innovation? So, I think that people are reading this as a canary in a coalmine on a lot of different fronts..Yes, the popular perception or the popular punditry is that it tells us what's happening in global markets but I'm with you. I think it's more a question of what's happening at Apple. Again, another guy whose life I've followed very closely was Steve Jobs and when Steve Jobs died, having read the biographies, understanding the way that he was trying to do things with the new Apple, after he had been kicked-out and then came back later. There were many who felt that this was going to have a significant impact on the company. It's to his credit that the legacy has continued, that Apple has continued to expand even though Jobs has now been gone for about 6-years. However, there are some big issues that we are now starting to see. That innovation is a key one. Jobs was the prime innovator. He loved design and he was unbelievable at innovating and there's only one Steve Jobs. Tim Cook is a good guy, he's a former chief operating officer, but it's like putting an accountant as the CEO of a company that's a challenger in a particular area. Unless it's an unusual accountant, you're not really likely to be able to find the innovations and creativity, which is going to give you the growth in the market share – that's the first thing..The second thing was price, and this is a key thing for us. We've learnt at BizNews, Felicity, that price must be kept low. Jobs said that online – his number was $5.00 so, there's no accident that our Premium Subscriptions are pitched at £4.99. So, in other words, the £5.00 level. It comes straight from Steve Jobs' playbook because he said, 'when you go above $5.00 with a monthly subscription, it starts becoming something that people have to reassess and look at in a different way.' If it's $5.00 – it's such a small number that you can get them signed up and then you keep adding value into the long-term and they stay with you forever. But what's happened at Apple is since Jobs' departure the escalation in the pricing of the products, the gross in the profit margins has been far above where it would have been, I believe anyway, had Steve Jobs still been around. So, if Jobs was still running the company, you'd probably find that the prices of the iPhones and the other products would not have been escalated to the degree that they have and maybe the accountants are getting more involved now, rather than the creative people..There comes a tipping point at some point in time, where this works against the business. Now, I don't think Apple has ran its race, not by a long shot. The ecosystem is still there. That hasn't really been impacted much. They haven't been able to, yet, to yield the benefits from it but the problem is the services side of Apple is only 15% of the total turnover and that is an issue. What this price increase has done though – it's got people who would have been besotted with Apple, like me, with perhaps misguided loyalty would not have even looked at an alternative. Suddenly, I am looking at alternatives and, as we were talking off air, on my iMac I am now using Windows. I've now switched across to Windows because we need it for our internet radio station, and what I've found is that the old, clunky Windows that I remember from about 10-years ago is a very different proposition today, and Windows 10 is as good as the OS that I've been used to now on Apple. So, hang on a minute, maybe the next time when I go and get an iPhone I might go for a different phone, which costs half as much as what the iPhone costs, and so on and so forth. So, it's this very dangerous area that Apple is playing in at the moment, where it does have a closed ecosystem and you will pay a premium for it. But how big is the premium? Jobs knew this, and he was very sensitive to this. His successors, it would appear, have actually dropped the ball on that. .Yeah, you can only milk a cash cow for so long, right, and Apple doesn't seem to have anything lined up to replace it, as it's milking this particular cash cow ever harder, there's not a new one being born so, it is definitely an interesting time for the company. Now, this had a big impact on global markets, or let's talk specifically U.S. markets. So, the Dow, the S&P, everything sort of slumped a lot in the wake of this news, and then on Friday rebounded after the Fed said some comforting things to investors and after extremely strong jobs report out of the U.S., so what we're really seeing is, and it seems to me, in global markets is we're really seeing the return of volatility, which we hadn't seen since, I would say, early 2016, and that can make people feel nervous and that can make investors make the bad choice or make the wrong call, right, because nobody likes to see their investments rise and fall very sharply in a short amount of time. And sometime when that happens people panic and maybe sell at the wrong moment or dive into the market at the wrong moment. .So, really, a return to volatility and that poses risks for investors. .It does indeed, and it also puts more responsibility on basic investing and what I mean by basic investing is what Warren Buffett says. If you buy a farm you don't look at the price of the farm every day. So, one day you have rain and things are growing so, the farm is worth more money, and then a few days later you don't have rain so, should you be dropping the price of that farm? So, you should be looking in the same way at your other investments, your equity investments. If you buy a share you should not be following the share price on a day-to-day basis, but you buy it on the understanding that if the markets were closed for 5-years at the end of that period you'd be satisfied still owning that share. In the same way as if you were to buy a farm, or a house or any other long-term asset. .Unfortunately, this whole psychology, this whole pop-kind of mood of trading the market – I hear it often with people that I engage with, who want tips on shares and they want to know how they can become 'investors' and make more than 20% a year. Now, Buffett only makes 21% over an extended period and he knows a whole lot more about investing than just about every other human being alive. So, how's it possible for someone who is coming into the game from scratch to even think that they can make that kind of money? More likely they're going to lose 20%. If they're lucky they could lose a lot more than that. But that's where it comes back to volatility. If the volatility is too much for your heart, if you're not sleeping at night, and I say this to people who have invested in our Global Portfolio – if they find that the way the share prices are whipsawing then reduce your exposure or actually, teach yourself, if you can, just to switch-off and wait and take a 5-year view. Then in 5-years' time, when you have a look back, wow, you'll very likely have had a good return. .This is quite instructive when you have a look at our Global Portfolio, which we started in 2014, nearly 5-years ago. If you have a look at the return on that portfolio at one point it was showing 41% annualised. Now, it doesn't matter how clever you are you're never going to be able to sustain that kind of a return, twice of what Warren Buffett is generating. Now, it's down into the 20s because we've had a selloff. If you had said 5-years ago you'd get 20% a year return on a long-term equity investment – you would have grabbed it with both hands. But now some people are saying, 'oh, goodness, in September it was showing 40% a year – I should have sold then.' But the trouble is, the most instructive example I have of this was Amazon. When Amazon listed in the mid-1990s it had a good start to its life and right up until the peak of Nasdaq in early 2000, the share price of Amazon rose with the rest of Nasdaq and then, after the bubble burst, because it had risen too far, it dropped 97%. .Now, think about this. Amazon's share price because of the Nasdaq crash, dropped to 3% of the level that it was at, at its peak in the Nasdaq crash and since then, of course, it's done extremely well. But if you go back to the year 2000, had you bought Amazon at the peak, at the absolute peak of the Nasdaq market you'd still have made 10-times your money today. So, it kind of gives you an understanding that you've got to ride through. Even if you make a real blow and unfortunately you buy the shares at absolutely the wrong time, as everybody did with Amazon at the peak of the market. If they understood the company and understood why they bought it an closed their eyes and put it in the bottom drawer and carried on with the rest of their lives – when they looked back in a few years' time they could have a 10-bagger, as happened in that case. So, it's all about being absolutely confident about the business that you're buying into, and then having realistic ambitions on the return of that investment, and those realistic ambitions have got to be what you would gauge against anything else that you would with any other return on investment that you'd be happy with. And anything in double figures per annum, compound over a period of time, you're doing pretty well..That's right and people have got to try and separate the emotion from the rationality in investing, which is very hard to do of course, because humans are emotional creatures but if they listen to your good advice and just take a step back and think with their minds and not their stomachs, I think people can ride out a difficult market. Not necessarily a bear market but a difficult market. .Now, before we wrap up for this episode, I wanted to very quickly just touch on, looking ahead, JSE 2019 – there's been some negativity out there. People saying, 'can you rely on the JSE, if that's your primary saving place for retirement?' What's your take on that for people in SA, who have most of their savings or most of their retirement savings at least, invested in the JSE and are worried about what the year may hold?.When we started the Global Portfolio the point there was that we were deeply suspicious of Zuma-nomics and rightly so, because it was just an excuse for plundering. We know were the country has come from. We know how difficult the situation has been and we know how backward or how much potential growth the economy, not only gave-up but in fact, contracted. But that's all done now. Zuma-nomics is out of the way. We're getting back to normality, to normalcy, and SA is an emerging market with enormous potential, the most incredible people. You just have to look at what Saffers do around the world and you know that this is a font of great enthusiasm, great energy, and great innovation. So, it is a country that is positioned in every way you want to look at it, for a rebound. .To also look back over the last 5-years and to start using Zuma-nomics – using the absolute pits of governance as your benchmark at what is going to happen into the future. I think it's sensationalistic, to say the least. My sense on this is that if you just look at it in perspective in 2018 the SA market was down 11%, the JSE. That's not good but by the same token emerging markets were down 17%. So, if you were an emerging market fund manager and you were over-weight SA, you would in fact, be drinking some Cape wine today in celebration of the fact that your SA stocks have outperformed those of other emerging markets. That's the first point..The second point is that it's a little bit like the people who sold Anglo Platinum at the beginning of last year. Anglo Platinum collapsed. The news about platinum was awful. The trade unions on the mines, AMCU, were looking increasingly militant and as a consequence of that all the news was bad. But if you had gone against the trend and instead of selling when all the news was bad, or perceived to be bad, and you bought Anglo Platinum, you would have made 52% on your money last year. Why? Well, platinum is still a noble metal, but an interesting thing there as well is that the world is starting to wakeup to the reality that fuel cells, which effectively take hydrogen, use a platinum catalyst and then generate the energy from the chemical process. Fuel cells are a viable alternative to electric motors, when we go into the future. They might not dominate the field. Electric motors might indeed be it, but fuel cells are being developed in China. Toyota has backed it completely. Hyundai, this year, also came out with fuel cells. What does that mean? It means that there is demand for platinum again. Platinum is not going to just be thrown away. As a consequence of that the platinum shares have improved and if you have a more optimistic projection onto platinum into the future and fuel cells indeed do take off. Well, you can imagine that today's prices for platinum is going to be a fraction of where they'll end up. .I'll just translate that into the SA situation. We have a country that with Zuma, rightly so, people were negative, and the country's prospects were Zimbabweish. Now, that has been averted. Now, we are moving forward. It's not going to be smooth sailing. There will be volatility, but you don't sell at the bottom. You actually buy at the bottom so, to be now advising people to be dumping their SA stocks, after a year where they've outperformed emerging markets and indeed in a position where the future is a whole lot more promising than it was over the last 5-years, if you're using it as the benchmark – I just think that that's irrational.

The Editor’s Desk: Behind the Apple-inspired market chaos

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