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Tuesday, March 12, 2013

Buffett Genius Fails Apple

BuffettBy Markos Kaminis,

There is a theory going around the corporate world that allowing your stock price to rise beyond the reach of round-lot seeking civilian investors builds a sophisticated shareholder base. It’s a theory born of investment genius, and one seemingly shared by Apple (Nasdaq: AAPL), but it’s a theory that has just been effectively challenged.

The theory goes that a sophisticated investor base will do less trading and prove to be less reactionary to temporary anomalies and news flashes. As a result, companies with ridiculously large stock price figures are supposed to see less volatility in their shares. It should provide for a steady stock price that best reflects the value of a company, which makes perfect fiduciary sense. After all, what is best for shareholders is best for a public company. When you can keep your stock price clear of noise, you help to keep it as close to its intrinsic value as possible. Perhaps not coincidentally, it should also allow corporate bonus incentives tied to stock price performance to be unadulterated by sinful day traders and greedy profit seekers, otherwise known as the efficient market. This begs to question whether an excessively high stock price fosters inefficient valuation, but that will be the subject of an academic research report well suited for the blog.

The idea was born of Warren Buffett genius, as far as I know; or at least Buffett’s Berkshire Hathaway is most famous for it. Berkshire’s A Class Shares (NYSE: BRK.A) trade at a preposterous $155,411.27, and yes, I satirically included the cents to pose protest to the silliness that some might call a form of class warfare. It is really not class warfare, though, because those interested in riding along with Buffett genius can still buy the B Class Shares (NYSE: BRK.B), which trade at a pauper’s price of $104. Other companies with high trading points, like Google (Nasdaq: GOOG), for instance, have determined to offer other classes of shares to maximize capital access opportunities.

In Berkshire’s case there very likely is a real impact to the shareholder base. It’s because of the significance of the numbers and the fact that they represent dollars. As the share price rises toward the big bucks that better resemble the cost of a home (though not anywhere near New York), it gets impossible for little guys with big dreams to afford even one share.

Apple stock chart

Chart at Yahoo Finance

However, that genius did not prove true for Apple over the last six months as the company’s shares fell 39% from their September intraday high of $705 to their $432 close last week. Though, I suppose an Apple (AAPL) fanatic might attribute that to the share price just not reaching that certain threshold point where the short-sighted could no longer get in. In any event, it’s one of the reasons one might argue against an Apple stock split, or at least one of those I listed in September 2012. For those of you praying for AAPL to keep falling so you can buy a share, I also made the case for an Apple stock split just to be fair.

In recent works about Apple, I have attributed the stock’s performance to investor concern as to where future growth will come from. I have indicated that For Apple, No News is Bad News. Though some will argue that despite the stock’s performance of late, there’s no problem, I have suggested The Problem with Apple is Apple and what seems a late in arriving next best thing, which I have openly hoped would be an Apple Television.

This turn of events for Apple seems to say that no matter how high a stock price is kept, the operating performance of a company and expectations about its future will always dictate what its investors do, whether they are small-money bearing individuals, affluent and wealthy people, or sophisticated institutional investors.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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2 Comments:

Anonymous Markos Kaminis said...

I admire Warren Buffett, and was flattered when he mailed me a signed letter, graciously responding to my impossible request to work for him in Nebraska for free out of college. He said they hardly had enough room for the small staff in place, and I don’t blame him, after seeing for myself the great variety of characters that exist on the figurative Wall Street. I probably wouldn’t accept any kid out of college either, not without a letter from the President and an exorcism from the Pope. I was planning to make a mentor of the man I admired, and to deliver pizza to pay my bills in the meantime. I found my own way, but it took a little while longer as I worked through significantly poorer bosses in both character and achievement. I would still work for free for Warren Buffett today, and don’t mistake that for humility, because it would be well worth it to learn from him. The share price of Berkshire is just another example of Buffett genius.

9:35 AM  
Blogger Edward Emory said...

And yet Buffet was taken on by his hero in a similar situation

12:07 PM  

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