The concept of over or under-pricing of stocks is a phantom. It's the phantom that stock-pickers chase, almost always without success. Nobody really knows until after the fact whether a stock was under or over-valued since the markets are constantly pricing in everything which is actually known. Everything else is guesswork. This is not my own idea -- lots of important work by economics backs up this statement.
This discussion isn't really the domain of economics, which deals with the macro world of supply and demand inputs, global resources allocation, etc. It's the domain of finance and business analytics (two areas that are my core profession). That said, I understand what you meant...
If by "stock pickers" you mean "day traders"... they're not investors by any reasonable definition. They're speculators (and the worst kind) who use what they call "technical analysis" which is the fallacy of believing that the market activity chart history can tell you the market activity chart future. They're not analysts in any professional sense of the word.
What I am talking about is, at its core,
business valuation. Any business analyst, M&A consultant or private equity firm can and routinely does know what the operating value of a company is, and can make projections on what their operating potential is (within reason).
What I'm NOT talking about is so-called "technical analysis" whereby laypeople and even low level financial advisors use meaningless ratios like price to equity to rationalize what ultimately is just dart throwing and not hardcore business valuation mechanics which is the process of determining what an institution or company should pay (fair value) to acquire a company.
When I use the term "underpriced" or "overpriced" I'm talking about comparing market price relative to what the actual book or intrinsic value of the company is... the latter of which is absolutely measurable, especially in the world of manufacturing where it's easy to tick and tie inputs to outputs.
A shrewd investor doesn't look at a "stock" as a "stock."
A shrewd investor takes on the responsibility of sound business decisions, and treats every security as a company that they are evaluating (in a process that doesn't take very long or invoke totally esoteric formulas) for the purposes of intelligent acquisition. Then, the shrewd investor concerns themselves only with paying less for the asset than the asset is worth, because more often than not, if you've acquired an otherwise sound company at a reasonable margin of safety (the degree of discount, or difference between market price and intrinsic value), it will advance better than companies that are operating poorly.
But it's not concerning me when they don't advance, because I've not exposed myself to so much risk that I am forced to dispose of any asset at any given time. And I keep repeating this process of staggering realized gains on companies that I purchased at a discount and can now dispose of at a premium... rarely ever am I so heavily invested in any one issue that the dogs are going to kill me. But I don't go after a lot of dogs. The ones that get dogged the worst are companies that people are very aware of, so called "hot stocks" are the ones that become dogs. The ones nobody is looking at unless they're a serious investor, are pretty stable because very few speculators are playing casino with them. This can be either because the market is ignoring them, or, as in the case of Berkshire Common Class A, because the average speculator cannot get on board... and I like it that way.
That said, important work also backs up the idea that the best stocks of any given time period are unlikely to be the best investments in the next. At some point, AAPL will begin to stall. The trick is picking the next big winner before anyone else does. Nobody can do this with any consistency. This isn't a theory, it's a proven fact.
I agree with the first half, and I *somewhat* agree with the last statement (consistency is possible depending on how you define "winner"; I don't define it as "slam dunk every time"). But I disagree with the middle of this statement, specifically about the trick being picking the next "winner". As does Benjamin Graham, finance professor at Columbia who, in conjunction with David Dodd, wrote the book "Security Analysis" which quickly became the gold standard by which professionals in finance conduct business valuation from within... as well as external analysts who work for ratings agencies, M&A operations and private equity firms (one of my colleagues is an SVP of Operations at Platinum Equity, and can confirm the models they use to evaluate the nominal price they should put forth to facilitate an acquisition). This is particularly relevant since institutional investment and market makers do have an impact on market price... and it's the interplay between their valuation and speculative noise mucking up the markets that results in market price irregularities relative to actual value. These irregularities are the opportunities that a shrewd investor pursues not by aggressive buy and sell, but by aggressively researching the underlying operations of companies that are candidates for investment.
"Price is what you pay. Value is what you get." - Warren Buffett
Graham's star pupil, the only one he ever gave an A+, was Warren Buffett. Along with Walter Schloss, Jean-Marie Eviellard, Stan Perlmeter and Charlie Munger, Buffett is among a group of highly educated individuals who have two things in common: They're all disciples of Graham and Dodd's value investment philosophy and fundamental method of security analysis, and they've all become billionaires as a result of consistently applying his principles.
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return." - Benjamin Graham
The job of an investor, as Graham puts it above, is not to take huge risks and hit home runs all the time (which as you indicate correctly is not possible). It's to protect one's self from loss of principal, acquire sustainable lower returns, and let them compound over time. Implicit in this is one rule by which all value investors make their fortune: You will invariably make bad decisions from time to time. What wins is not making slam dunks exposing yourself to catastrophic risk, but knowing how to insulate yourself from catastrophic risk when you invariably make bad decisions.
The largest factor in insulating against catastrophic loss is by ignoring what the market has to say. The market is full of morons who behave irrationally. You want to sell to these people, not be these people. So, a shrewd investor looks the other way, on a very long time horizon, for companies that the market has underpriced by a significant margin relative to what the actual net working capital of that company is.
Consistently, decade after decade, these investments recede less in times of market distress but advance farther in times of economic prosperity. The net result is preservation and compounding of accumulated capital. It's great to pursue unrealistic returns but remember: Any number times zero is still zero. Every dollar of principal you risk and lose is years of compounded returns you've lost.
I've ridden this AAPL bull for nearly 15 years now. I made one great investment guess in my life. I consider myself to be extremely lucky, not smart. Consequently, my AAPL profits are going into index funds, where you don't have to be lucky to make money, just persistent and steady.
What you're telling me here only reinforces my statement that people seem to want Apple to be that easy cash train because they refuse to do the few minutes of homework it takes to identify the soundness of an investment. And by shifting to no-load index funds, you're doing the right thing that I'd recommend for anyone who isn't a high net worth individual with a comprehensive understanding of finance and business valuation. Most of you are never going to beat the S&P's 9.3% annual compounded average year over year.
But, to pique your curiosity, read the
Superinvestors of Graham and Doddsville, to see how every one of Graham's pupils did for decades consistently beat the S&P. It's not rocket science. What it requires is patience and diligence... and a refusal to let Mr. Market tell you what you ought to pay for an asset. Following that, the best possible read on value investing is Graham's
The Intelligent Investor. More advanced individuals, who have a background in Finance, may want to add
Security Analysis to their reading list.
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i'm not an expert, but i think many have said AAPL is undervalued. There is so much room for growth here. I just bought a few shares w/ Scottrade. Only $7 trade, so I just need it to go up a few bucks to make a positive return.
Never let what other people are paying for an asset tell you, as an intelligent person, what you should pay for an asset.
Apple's room to grow shrinks with each quarter of growth.... think about it.
If they make $100 billion and then grow 30% in revenue, that's what? $130 billion.
Now what's it going to take to keep growing 30% year over year? $39 billion more revenue than prior year. Then $50 billion. Then $65.7 billion...
But every year as they do this, share of wallet they haven't acquired is shrinking. They can only replace products at a certain pace, because if they've already got 20% of your disposable income, and your disposable income is stagnating.... where's that additional $39, $50, $65 billion coming from?
Even Buffett has noted that the 22% year over year growth Berkshire has enjoyed is going to shrink, because at the $100 billion plus revenue scale they are at now, it will take humongous moves of the needle to keep producing double digit growth into the future. In Berkshire's world this requires more float than they have, or in Apple's world it means more products than consumers will buy in a given year.
An easier analogy is filling a glass... if the glass doesn't keep getting bigger faster than you pour into it, what is happening to the area of the glass that isn't filled? It's shrinking.
Even if existing customers replace products, that's just accounting for maintaining zero growth and not a decline. That isn't going to generate the needed growth of share of wallet to keep the needle moving at the pace that it has been.