Sunday, January 23, 2011

Example of Investment Bias: The Apple Hater

Here’s something macro, to think about this lazy Sunday:

So there’s this blog post this past Wednesday in the Wall Street Journal, where Bruce Greenwald, professor at the Columbia University business school, has a few choice words to say about Apple:
“Apple is unlikely to be as sustainably profitable as it is today. All these things are consumer electronics. In the software race they’re losing to Google, and Google is giving it away for free. Android is likely to be the Windows of the mobile world, and Apple is likely to be a minority system. The open system has always won. Always.”
Okay, fair enough. But then Greenwald also goes on to say that Apple—
“[is] going to struggle along with their own system for a while [ie. the iPhone OS], and then they’ll bow to the Android reality. And then they’ll just be making consumer devices, and we know what that business looks like. They’ll be a marginally-profitable company.”
And finally, when referring to the $59 billion in cash Apple is sitting on, Greenwald dismisses it with a wave of a magic wand and says the following:
“If they’ve still got it [in a few years], they’re likely going to waste it desperately, trying to find alternate ways to make money. [ . . . ] The economics of this business are hopeless in the long run.]”
Now, Greenwald isn’t just some random schmuck: As the WSJ proclaims, Greenwald—

is well-equipped to handle these questions. He heads Columbia’s Heilbrunn Center for Graham & Dodd Investing, a place revered by people on Wall Street for its rigor and back-to-basics approach to investing. Greenwald is also research director for First Eagle Funds, which manages $51.9 billion.
So this is a guy who is “revered” on Wall Street, and who has a major hand in managing some major money—so he would seem to be someone worth listening to. 

The market share data would seem to bear Greenwald out: Between August and November of 2010, Google’s Android platform grew its market share from 19.6% to 26%, compared to Apple’s iPhone market share, which grew only 0.8%, from 24.2% to 25.0%. 

Case closed, right? Greenwald is right, Apple is doomed—right?


Well . . . let’s look at some facts: 
• In the above comparison, Microsoft’s share fell a calamitous 20%, from 10.8% to 9.0% of the smartphone market. 
• Research In Motion, creator of the Blackberry, saw its share fall from 37.6% to 33.5%—and they have been the leading edge of the smartphone market. 
• Furthermore, Android is currently available on all phone carriers—Apple’s iPhone was only carried by AT&T, until the recently announced Verizon deal. So as Verizon customers—who either had been locked into Verizon contracts, or did not want to sign up to an AT&T contract—begin using the iPhone in droves, Apple’s share of the smartphone market will likely increase in the short and medium term—drastically.
• Aside from the smartphone market, Apple’s stores (all 323 of them) are the most profitable stores per square foot in the world.  
Apple’s share of the personal computer market is a (growing) 9.4% in 2010, and sales of Macintosh computers grew 23% year over year. And insofar as the tablet market is concerned, Apple’s iPad—using the iPhone OS—has a 95% market share. 
• Aside from that, Apple has no serious long-term debt, has the aforementioned mountain of cash, has a steady product line, and aside from Steve Jobs’ recent health issue, a steady management team. 
That Apple is exceedingly profitable today is unquestioned. That Apple might well become less profitable in the future is also unquestioned: Nothing lasts forever. 

But in the short to medium term? Say over the next five years? If Apple suddenly developed Corporate Alzheimer’s, shipped literal turds to all its customers with accompanying dog-piss spray cans, and then set its corporate offices on fire, then maybe Apple might be in trouble over the next three to five years. 

Barring such a complete corporate breakdown, Apple is probably going to do fine over the next five years. 

So what are we dealing with, when we deal with Bruce Greenwald? We’re dealing with investment bias: An inability to see the reality of the marketplace, and instead see what we want to see. 

Check out the above-quoted phrase about how Apple “[is] going to struggle along with their own system for a while, and then they’ll bow to the Android reality.”

Talk about failure to grasp reality! If this is Apple “struggling along”, God help us all when they get on a roll! 

Clearly, Greenwald is unable to see what is looking right at him: Right now and for the foreseeable future, Apple is going to be a major player. It has the cash, the technology, the management, and most important of all, the hot product that everyone loves. 

Greenwald has fallen—majorly—for investment bias. 

Now, if someone like Greenwald—a big brain running major money—can so easily slide into investment bias, then it makes one wonder: 

How easily do we fall for investment bias? How easily do we fall in love—or hate—with something or other, with no rational basis in reality? Or (worse yet) a very tenuous relation to reality? 

How often do we take the slimmest sign that our investment biases are right, while ignoring mountains of evidence that we might be wrong? 

So for this Sunday, The Hourly G commands you (like the third-rate oracle that it is) to re-examine every investment decision you have lately made—but to analyze it from the opposite end: If you are sure that gold will go up, honestly and carefully go analyze the case for gold going down. If you are absolutely positive that the economy is about to crash, analyze the data to see if maybe the economy really is improving. 

Always remember: The truth is never afraid of a little scrutiny. It’s the half-truths and biases that freak out when you start to examine them. 


  1. Every day I try to figure out why the dollar will NOT collapse.
    But I can not figure any realistic reason:
    1. A revolutionary productive improvement e.g. manufacture products for 1/10 of today's costs
    2. Farmers produce ten times their crops for the same cost
    3. Cheap robots do all manual labor
    4. US discovers tons of gold under Washington DC, next to tons of crack cocaine.
    Compared to:
    1. Federal Reserve does QE to infinity.
    2. Obama's economic policy (stimulus, more regulation, bow to union demands, bail out states) reduces unemployment
    3. US public demand for more entitlements
    It's inevitable, the dollar will collapse.
    Please feel free to point out where I'm wrong.

  2. Greenwald statement that the "Open" system always wins shows how little he knows about what "Open" means. The only person in the world who thinks Windows is "Open" is Bill Gates (and, now, apparently Greenwald as well). Windows worked backed in the wild west days of OS, not because it was the Android of its time: it was because Gates gave developers free SDKs, while Apple demanded to be paid for theirs. You can be sure that as table stakes in today's world, no one does that anymore. So will Apple succeed? If they stick to their plan of issuing great products - built on a proven "Closed" platform - every 12 months, sure.

  3. This post is precisely why I bounce between you and Krugman. Every "the sky is falling" post by GL is offset by a "meh..." at Krugman. Somewhere in between lies the truth.

  4. Well you're wrong about the android not being available on any phone carrier. T-Mobile currently carries the Android but its almost $400 dollar price tag scare away a lot of people.


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