Wednesday, October 12, 2011

Apple - Rim

What marvelous creatures we investors are: so different and yet so much the same. Consider the pickle barrel that Steve Jobs and Jim Balsillie were in before Jobs’ untimely death: Jobs was the Chairman of Apple Inc. (AAPL), Balsillie of Research in Motion (RIMM). Both are/were billionaires because of their ownership of industry leading high tech firms. Since mid-2008, Jobs had seen his AAPL stock rise from under $165 per share to over $400 per share. Balsillie saw his RIMM drop from almost $150 to under $22 in August -2011. (These prices are all in US dollars) Jobs got way richer at the same time Balsillie got way less rich. Yet both are way richer than most of the readers of this article.
Big institutional investors like pension plans and mutual funds might own shares of both AAPL and RIM – and their holdings have been affected by the rise and fall of these two high tech giants. Although the professional decision makers for these mega investors may not personally own the shares, they participated in the rise and fall of these two high tech stocks. And their decisions to buy or sell their clients’ shares affect the rise and fall of AAPL and RIMM share prices – and they also affect the rise and fall of the financial net worth of Jobs and Balsillie.
Then there are the ordinary investors who may own shares of AAPL or RIMM. Most of us can buy or sell our whole position without affecting Jobs’ or Balsillie’s net worth at all.
Isn’t it fascinating how different we all are with respect to AAPL’s rise and RIMM’s fall? Different, yet, somehow, the same. Jobs and Balsillie were both Chairman of the Board and significant shareholders of their respective companies. One is a hero; the other – somewhat less than a hero. One became a lot richer than he was – one, somewhat less rich.
The mega-money portfolio managers are in the most interesting predicament. Imagine sitting at their computer screens, managing multi billions. Imagine you managed a huge portfolio of high tech stocks in June 2008, and your clients had approximately equal portions of RIMM and AAPL. Now, because of the rise and fall of these two giants, they have 20 times as much AAPL as RIMM. As the manager of these mega-funds, what should you do? One possibility is to readjust your holdings so you have equal amounts again. In this case you would sell a few gigs of AAPL and use the proceeds to buy RIMM. They call this “rebalancing:” it’s the kind of thing value investors do when one stock runs way too high and the other way too low. The mega-money managers realize that years from now AAPL might not stay the hot-stock darling it is today, and RIMM might not remain the ugly sister. Because their positions are so big, the mega-bucks managers can’t really sell out of the market all together. So they adjust the percentages of their holdings, maintaining a diversified portfolio at all times. It’s the prudent thing to do.
And what about you? What should you do? Most professional advisors encourage small investors to behave like large investors. Ordinary investors are encouraged to own large diverse portfolios and let the professional mega managers run them. That’s what the mutual funds business is all about. Small investors trying to behave like big investors.
But that is a serious error.
In my investing book, Beyond the Bull, I encourage readers to develop their own way of investing and to take advantage of their edge. Small investors have one huge advantage over mega-money. Liquidity. We can buy or sell RIMM or AAPL without affecting the price at all. So, why would we have owned a single share of RIMM since June 2008? Why not just sell out and be done with it? Why not just own AAPL, and nothing else, and get richer like Steve Jobs did? In fact, why would we ever own any investment that is not in an up trend? Why should we behave like mega-money at all?
We are all the same, yet so different. If we are high tech genius’, we should start a high tech company and get rich like Jobs and Balsillie. If we love the markets, we should get a high-priced job with a mega-money pension fund manager and prudently rebalance our way to the top of the heap. And if we are an ordinary investor, we should figure out how to tell an up trend from a down trend. Whatever of these three we pick, we can be successful in the world of money.

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