June 11th, 2007
In my post of May 31 I wrote:
“The products and businesses represented by those stocks go through life cycles and those life cycles are amplified or augmented, on the one hand, by the life cycle of the economy and, on the other hand, by the life cycle of interest in the momentum of the companies’ stocks. Success will come to those who discern where stocks are in their life cycle.”
Some may ask, “What’s the use of looking at the history of a stock going all the way back several decades? Isn’t it only important to see where the stock is today relative to its intrinsic value and what it’s earnings expectations for the future?” I believe that we can learn much about how to make really big money in the market by studying the price action of stocks we’re familiar with within the context of it’s individual company dynamics and the overall economic and socio-political environment at the time.
Two of such stocks made new all-time highs yesterday and great examples of the concept of Life Cycle Investing: Apple Computer and Google.
Apple went public in January 1984 at $3.83 (all charts are adjusted for stock splits); by mid-August it had declined by nearly 50% to $1.81. It’s instructional looking at AAPL’s chart during its IPO phase to determine what decisions we might have made when looking at this 20-20 rearview mirror and it’s clear that buying in on the IPO would have resulted in some dead money for at least 24 months:
It wasn’t until 1986 that AAPL actually went above it’s IPO price and, as is very typical, it formed a pennant consolidation pattern extending over about 6 months before continuing an upward leg.
The best time to buy AAPL would have been on a breakout from the pennant at the end of November, 1986 at $4.50 leading to a 330% increase to 15 in October, 1987 at which point it stalled out coincidental with the 1987-Crash.
There wasn’t an opportunity or need to own AAPL for over 4 years, until the beginning of 1991 when it broke out of a downward sloping consolidation channel. That breakout is another indication of how long-term consolidation patterns can be very reliable and profitable. That breakout wasn’t as reliable as it seemed since it went into a second consolidation pattern, a pennant, out of which broke down and continued declining for 4 years to prices not seen since IPO days.
The whole of AAPL’s performance is visible in the following charts on which notes, taken from an unofficial history of Apple at Apple-History.com, provide a business context for viewing it’s whole history.
It seems that it might be too late to buy Apple because of the run-up it’s had in anticipation of the iPhone introduction but a look at it’s history since its IPO in 1984 is an excellent illustration of the power and risks of momentum and Life Cycle Investing.
(next: retro view of GOOG)