In 2014, Jeff Huber invested $10,000 of his money in Apple Inc. Jeff saw the demand for Apple’s products and services and, after analyzing the company, decided to purchase its shares, at $25 a pop.
Two years later, in 2016, Apple’s shares traded at the same price—$25.
Jeff, questioning his investment, decided to re-evaluate the company. He looked at its financials again: sales for the company had grown in the two years he had been invested from $183 billion to $216 billion. Good. Cash flow for the company available to be paid out to shareholders grew as well from $2.05 to $2.44 per share. Also good. Demand for Apples products and services remained strong. As did the corporate stewardship and culture of the company. Jeff decided to remain invested. And it’s a good thing he did.
In 2017 Apple’s share price took off like a rocket, hitting $44 per share.
In 2018 it hit $56 per share.
In 2019 it hit $70 per share.
In 2020 it scaled to $130 per share.
And continued scaling.
Today it’s about $190 per share—7.6x what Jeff paid in 2014.
Jeff’s $10,000 investment in Apple today is worth close to $80,000 with dividends.
A pretty good investment.
Jeff was wise to disregard the stock market’s feedback in 2016. What it was telling him then, that Apple was a mediocre company, couldn’t have been further from the truth.
In 2020, at the start of the pandemic, Jeff’s buddy Ron invested $10,000 of his money in Zoom Video Communications’ stock, anticipating the demand for its Zoom video platform during the pandemic. He paid $100 a pop for its shares.
It wasn’t long before Ron looked like a genius.
Zoom’s stock shot upwards—reaching $550 per share in October of 2020.
In just eight months the value of Ron’s investment had ballooned to $55,000.
What happened next?
Zoom’s stock price tanked.
Today Zoom’s stock is valued at $61 per share—39 percent less than what Ron paid for it. Ron’s $10,000 investment today is valued at $6,100.
The feedback the stock market was giving Ron in October of 2020 was false, or at least appears to be today.
The above examples are very common in the stock market.
The stock market often makes you feel wrong—when you’re right.
And right—when you’re wrong.
The only way to tell whether the stock market is right or wrong is to have a deep understanding of your investments, including their intrinsic value—or—if you don’t select the investments yourself, to have deep faith in the person selecting your investments for you, in their investment philosophy.
That’s the only way you’ll be able to ignore the feedback the market is giving you.
The only way Jeff knew the feedback the stock market was giving him about Apple in 2016 was wrong is that he had a deep understanding of Apple and its intrinsic value.
Ron, on the other hand, didn’t have as firm a grasp on Zoom. When he invested in the company (at $100 per share) it was earning just 50 cents per share in cash flow available to be paid to shareholders. That’s just 0.50 percent of the purchase price. Compare that to Jeff’s investment in Apple, where he received over $2 per share of cash flow available to be paid to shareholders on a $25 share price—8 percent of the purchase price. Jeff got a much better deal with Apple than Ron did with Zoom.
Tale of Tapes
In the years since Jeff and Ron made their investments here are the results for Apple and Zoom:
Apple
Apple grew its sales from $183 billion to $380 billion; and it grew its cash flow available to be paid to shareholders from $2.05 per share to $6.5 per share. Its share price meanwhile went from $25 per share to $190 per share.
Zoom
Zoom grew its sales from $622 million to $4.5 billion; and it grew its cash flow available to be paid to shareholders from $0.50 per share to $5 per share. Its share price meanwhile went from $100 per share to $61 per share.
Both companies did well but their stock prices went in opposite directions.
Why?
Because expectations changed.
And that’s all stock prices are—expectations.
The stock market is expecting less today from Zoom, and more from Apple.
It is more optimistic about Apple, and less about Zoom.
Looking Ahead
The stock market is always looking forward and trying to anticipate what companies will do, and pricing their stocks accordingly.
If you bought Zoom in 2020, you were getting 50 cents per share in cash flow available to be paid to shareholders on a $100 share price—representing just 0.50 percent of the purchase price. Today you are getting $5 on a $61 share price—representing 8.2 percent of the purchase price—what appears to be a much better deal.
If you bought Apple in 2014, you were getting $2.05 per share in cash flow available to be paid to shareholders on a $25 share price—representing 8 percent of the purchase price. Today you are getting $6.50 on a $190 share price—representing 3.4 percent of the purchase price—a worse deal.
Where we go from here depends on how the companies perform.
The stock market is always forward looking—and not always right.
Like a Rock
If you pick individual stocks you need to be rock solid in your assessment of the companies and their intrinsic values.
If you have someone else investing your money for you, you need to be rock solid in your belief in that person and their investment philosophy.
The stock market will test you. I can guarantee that. And the only way to pass the test is to be sure that the way you’re picking stocks (or the person picking them for you) is correct.
Otherwise the stock market will shake you out of your boots.
The best investment managers at times underperform. Sometimes, badly.
Keep this in mind when the market marks the value of your stocks down.
If you or the person investing your money has done good homework and valuation work, the market will reward you over time.
It just doesn’t always happen when you want it to.
Sometimes the stock market gives bad feedback.
Eventually, though, it gets it right.
Bottom Line
The stock market sometimes gives faulty feedback.
It tells you you’re right—when you're wrong.
And you’re wrong—when you’re right.
The only way to make sense of this feedback is to have done your homework.
To have conviction in the companies you invest in, or person investing your money.
That simply is the only way to tell when the market is being honest and telling you blatant lies.