As each economic cycle plays out, companies on average can tend to become more and more profitable. This helps increase earnings growth through a cycle, but also masks the risk that when profitability reverts to more normal levels, earnings rates will reduce.
It’s a key reason we’re so concerned about valuations of US stocks. Because it’s possible, in fact very likely, that any future correction involves a fall in revenues, profit margins, and PE multiples. The combination of all three creates a much bigger negative impact on share prices.
Quote of the month.
“I’ve never been rich, but I’ve never been hungry, either.”
Ronald Wayne, possibly the unluckiest investor, ever.
You’ve probably never heard of Ron Wayne, but you probably have heard of his one-time business partners. Ron co-founded Apple as a partnership with Steve Wozniak and Steve Jobs. He was invited to invest in the company by Jobs, after he helped to diplomatically sort out a minor disagreement between the two Steve’s. He accepted the offer, and bought in.
However, Ron was quite a bit older than the other two. Having previously had a business failure, he became concerned that if it didn’t go that well, he would again be in financial trouble. So, twelve days after buying in, he sold his 10% share of the new company back to Jobs and Wozniak for US$800. One year later, he accepted a final US$1,500 to forfeit any potential future claims against the newly incorporated Apple. Today, Apple is the largest listed company in the world. Even allowing for dilution from capital raisings prior to the Apple IPO, it’s fair to say that the initial 10% stake would be worth a LOT today.
Ron has said over the years that he does not regret selling his share of Apple. “I beleived it would be successful, but at the same time there would be significant bumps along the way and I couldn’t risk it. I had already had a rather unfortunate business experience before. I was getting too old and those two were whirlwinds. It was like having a tiger by the tail and I couldn’t keep up with these guys.” He has also said “What can I say? You make a decision based on your understanding of the circumstances, and you live with it.”
But that’s not the end of the story. In the early 1990s, Ron sold the original Apple contract paper, signed in 1976 by Jobs, Wozniak, and himself, for US$500. Ron Wayne has stated that he does regret that sale. With good reason. In 2011, the purchaser re-sold the contract for $1.6 million.
You can hear Ron tell the story in his own words here.
Media & Presentations.
Last month, we spoke with AFR journalist Tony Featherstone on whether there’s still value in LICs. The article is available here for AFR subscribers.
We also ventured out to Toowoomba in August to present to a very knowledgeable investor group. Our talk was titled “The world is nuts…and other interesting stuff”. You can download a copy of the presentation here.
Solving a first world problem.
Smart tech engineer Rashiq Zahid figured that McDonalds customers were getting tired of schlepping all the way to their local Maccas for dessert, only to discover the ice cream machine was broken. If you’ve ever done a late night Maccas run, you will know the feeling.
Rashiq, enterprising man that he was, decided to do something about it. So he worked out a way to access McDonald’s systems via the online ordering functionality and now knows in real time which McDonald’s locations have a broken ice cream machine. Don’t believe us? Head on over to https://mcbroken.com/. The bad news? It only covers US stores (for now).
This month in (financial) history.
On September 15, 2008, the financial crisis hit markets hard. Lehman Brothers started the day trading at $3.65 and closed at $0.19 a share, down 95%. Lehman filed for Bankruptcy later that day. The bank had been around for more than 150 years, but had become over leveraged and clients were rapidly pulling out assets from the firm in the panic.
Insurance behemoth AIG shares started trading that same day at $12.14. They closed at $5 a share, down 60%, as their exposures from underwriting subprime insurance bonds via credit default swaps started to become apparent. AIG would be bailed out the next day, which resulted in the U.S. government owning 80% of AIG. The initial loan amount was $85 billion and was to be repaid with interest. The debt eventually grew to an estimated $182 billion. By late 2012, the loan was repaid in full and the government had received $22.7 billion in interest.
Stock markets were down about 30% from their highs by the time of the Lehman bankruptcy and AIG bailout. But the worst of the financial crisis was still to unfold. Markets would fall another 30%+ before the lows in March 2009.
Meanwhile, in September 1997, just 24 years ago, google.com was first registered as a domain name.
On September 16, 1920, JP Morgan Bank in New York was bombed. The explosion occurred just before noon, caused by a horse-drawn carriage packed with explosives. 40 people were killed and 130 injured by the blast. The bombing seemed to have no effect on stocks on the day, as the Dow Jones Industrial Average finished up 0.92% on the 16th and up 1.49% the following day. The bomber has never been identified.
And finally, in September 1884. Britain ended its policy of penal transportation to New South Wales.