The current macro environment where the odds of higher interest rates into 2023 and perhaps beyond is well above average has created a challenging investment landscape. Yet, at the end of the day, investors who adhere to traditional “old school” analytical methods are likely to emerge from the current difficulties in better shape than those who chase fads.
The same can be said of how companies run their business.
Back to Basics Investing Never Goes Out of Style
The wealth destruction in social media and the technology area have been impressive this quarter. Shares of former Wall Street Darlings such as Facebook/Instagram parent Meta Platforms (NSDQ: META) have been at the forefront of the news cycle.
In my opinion, this is a secular (long term) shift in behavioral economics in which the global population will be more focused on the basic needs of daily life.
In this new dynamic, stuff that works, lasts a long time and is low maintenance and reliable, is likely to outperform more glitzy fare.
As a result, it makes sense to review some basic investment approaches.
Revisiting the Refrigerator Syndrome
The story is well documented, but worth summarizing. Companies like Meta, and Google parent Alphabet (NSDQ: GOOGL) are part of the landscape, but over time in hopes of growing their business they have branched into areas of technology that don’t necessarily have mass appeal, with mixed success, at best.
In the case of Meta, the company’s deep dive into virtual reality in the hopes of creating, or expanding a place where people could meet to recreate and do business via headsets and Internet connections has so far been a disaster, to the tune of losses in the billions of dollars which they may never recover. CEO Mark Zuckerberg famously lost $100 billion of personal wealth as his company’s stock crashed after the most recent dismal earnings report.
Note how the Accumulation Distribution indicator (ADI) is still heading lower even after the stock has been crushed. That suggests that short sellers are still hanging around.
Alphabet’s problems are more related to the economic cycle as companies who use Alphabet’s platforms for advertising are pulling back due to the inflationary environment and its effects on their businesses.
Alphabet’s issues are more likely to improve with time while Meta has a big mess on its hands. Still, ADI for GOOGL is still heading lower as short sellers smell blood in the water.
That’s because the Meta is suffering from a malady known as the Refrigerator Syndrome, which I recently detailed.
In summary, new technologies are initially dazzling and capture the public’s imagination. But over time, as they become part of daily life, they become like television sets and refrigerators; stable useful fixtures of every day life. As time passes, we take these things for granted and although they are part of our lives, they lose their sizzle.
That’s what’s happened to Meta with Facebook, as young users moved away leaving an older, perhaps stable but less appealing to advertisers user base place. Moreover, likely in the hopes of recapturing the younger audience, the company dove into the Metaverse.
But, it seems that management may have misjudged the public’s interest in a fictional world which requires a headset to enter.
Don’t get me wrong. I’m all for innovation. But if Meta really wanted to dazzle, they might have tried to design something like the holodeck in Star Trek where you walk into a room and make your fantasies really come true in a tangible basis. Otherwise, their earnings would likely have fared better if they continued to mind the money making portions of their business, Facebook and Instagram in a way that it would keep the younger crowed happy.
Meanwhile Back at the Apple Farm
There are two ways to look at the Refrigerator Syndrome. One is that refrigerators aren’t sexy. The other is that refrigerators are reliable and necessary. If you adhere to the former viewpoint, you view the refrigerator as an insignificant object. I would counter that a reliable refrigerator is an asset as it keeps your food fresh and your drinks cool.
In the stock market, we see this dynamic play out in terms of earnings and stock performance.
While Meta crashes and Alphabet succumbs to the reality of the economic cycle, shares of Apple (NSDQ: AAPL) have recently fared better despite the less than enthusiastic reception to the latest incarnation of its money printing device, the iPhone.
What’s most interesting is that Apple isn’t a new company. In fact, it’s been around since 1976, while Alphabet, formerly known as Google, was founded in 1998. Meta, the former Facebook, opened its doors in the 2003-2004 time frame.
So, based on its years of existence Apple hasn’t been sexy for a long time. In fact, it’s really a stodgy old blue chip stock now, despite its cool veneer. It even pays a dividend.
Consider that Apple usually delivers better than expected results on its earnings report, and somehow it spins its guidance in a way that the market likes what it hears. Its most recent earnings report delivered 8% earnings growth, 4% revenue growth and reaffirmed its guidance for the whole year. That’s hardly the stuff of legends.
Yet the stock rallied on the news. Note also that in contrast to META and GOOGL, Apple’s ADI is trending higher, as short sellers avoid the stock. That means that even if the shares decline in value, because they don’t have the selling pressure from short sellers, the rebounds tend to be better.
Moreover, with Apple there is always buzz about some kind of double secret project, such as the Apple car, which may be revealed at any moment. In addition, this company has more cash on its balance sheet than some countries around the world.
In other words, Apple is a perfect example of how to run a business. And its stock performance over the years, especially the lack of short sellers in a tough market is proof of that.
Managing the Message and Repackaging the Refrigerator Syndrome
Aside from running the business in a nearly pristine manner, Apple is also a master of managing its corporate image and its message.
For example, even after the lackluster reception of its iPhone 14, Business Insider ran an article touting the notion that Apple’s products are a necessity, not a luxury. So yeah, they’re like refrigerators now but we need them. And unlike its competitors because they are so much a part of our lives, we’ll continue to upgrade them, even if we do so more slowly.
And to a degree they are correct. I’m on my second iPhone now. The first one lasted over a decade.
The same can be said about iPads, Macs, and even iPods which are being phased out. I still have an iPod which is going on twenty years and still plays my favorite music.
What’s My Point?
There are certain principles by which successful businesses operate. And Apple is a master of them all.
- First, they make excellent products which last a long time.
- Second, they upgrade their software for many years in order to keep the product relevant. This builds user loyalty.
- Third, they always seem to come up with new wrinkles to keep making lots of money. And
- Fourth, they always have loads of money on their balance sheet which gives them options to pretty much do whatever they want whenever they want.
If that sounds familiar, it’s because this is pretty much what Warren Buffett and similar investment giants do. They invest in the business and run it responsibly.
And if that ain’t old school, I don’t know what is.
Old School is Always Cool
The world and Wall Street run in cycles. The most recent cycle was all about social media. The future seems to be more geared toward tangible, more mundane things.
It’s back to basics, old school time.
Food, shelter, and having a job are more important personal priorities than the number of followers one may have. Having a reliable iPhone fits that category.
Refrigerators, televisions, cars that can get you places, phones which don’t break down, and just about anything that is reliable, long lasting and affordable or at least worth a premium price will be at the top of the list.
Companies which can deliver on these metrics will be rewarded. Apple looks to be one of them.
Investors who focus on companies like Apple tend to do better over the long term. Which is why, Old School is always cool.
A Note from Dr. Duarte: You’ve probably been reading a lot about the exciting investment opportunities in the marijuana industry. Due diligence and “old school” approaches are required for the cannabis sector, too. It’s also important to remain patient, because positive regulatory changes are coming down the pike that will make a huge difference. Do your homework before investing in marijuana.
That’s where my colleague John Persinos comes in. As editorial director of Investing Daily, John held a special investment Town Hall on November 1. He called it the “Marijuana Millionaire Countdown.”
As the U.S. midterm elections rapidly approach, John explained the little-known reason why federal legalization of marijuana could be days away…and why a slew of states are poised to create new state-legal markets.
During the online Town Hall, John revealed the one simple marijuana trade that could dump piles of cash into your brokerage account, before the midterm votes are even counted. This event has been archived. Click here for instant access!