Sometimes making a great deal of money in the market can all come down to one single good idea.
If that idea is solid – and you are patient enough to see it through – it can be enough to make a fortune.
Just ask Warren Buffett.
He invested in Gillette because, in his own words, ‘It’s pleasant going to bed at night, knowing there are 2.5 billion males in the world who will have to shave in the morning’.
It’s surprising how simple the foundation of an idea can be.
In Buffett’s case, half the world’s population is male, and many are adults that have to shave each day. So, they will need shaving foam and razor blades every day for many years to come.
When Proctor and Gamble bought Gillette a few years later, Buffett made $645 million on the deal. Not bad for a day’s work.
My brother, while not exactly Warren Buffett, has done well following the same simple logic.
He was writing computer code before he could walk, and has worked in IT his whole career.
And he was also using Apple Macintosh computers – back when an Apple was still a type of fruit.
He liked the Apple Mac computers. They were a quirky product in a Microsoft dominated market – yet these ‘Macs’ were stable, a pleasure to use, and looked cool. He reckoned it was just time before they cleaned up the whole market.
So he bet big on Apple.
The result?
He’s made a more – than 4000% gain.
Having the clarity and conviction, and then patience to hang on for seven years in the hope you’re right about a company, is no easy feat.
Apple (NASDAQ:AAPL) may be all over the news right now, but Apple’s investors have been making incredible returns for years. This is the 10-year chart, which follows it from the wreckage of the tech-crash, to present day.
Apple share price – I’m not jealous, honest!
But because my bro is living in the UK, he also has the sweetener that the British pound is down 25% against the US dollar since he bought his shares.
…This means his 4000% gain is actually worth 5000%.
That’s more than a 50-fold increase in his capital.
Jealous … me?
It hasn’t been an easy journey, and seeing this spectacular gain has involved some major thrills and spills on the way. I remember when he was visiting me in Melbourne in January 2008, he saw Apple’s share price fall 80% in a few days. He shrugged it off calmly and went about his day. It then rallied and halved again later that same year. He was remarkably unphased.
Having a great idea is the easy bit. It’s sticking with it that’s the tough part.
Apple is suddenly getting a lot of media attention for a few reasons. For one thing, at US$560 billion it is now America’s biggest stock by market capitalisation.
It is also making a BILLION dollars in cash each week.
The cash pile is now around $100 billion dollars. Let me put that it context. By Christmas, Apple’s cash pile will be bigger than New Zealand’s economy.
So, with so much money rolling in, the company has voted to start paying a 1.8% dividend each year. But even then the company complains that, due to tax issues, it can’t pay out its cash quicker than it is making it. Sounds like a good problem to have!
But with Apple’s share price up 66% this year, it looks to me like the share price has got ahead of itself.
One big problem is that Apple is now the clear favourite among hedge funds, and where the hedge funds invest, volatility follows. At last count, over 200 hedge funds have taken a stake in the cashed-up maker of the iPhone.
And they are there for ‘a good time, not a long time’. So the hedgies will sell all their stock in a heartbeat if the going gets rough, then look around for the next punt.
So far, hedgies only have 4% of the stock but this is increasing. They are like sheep, so we can expect more to follow. When it’s time for them to take profit, we could see the share price drop. This often happens in the lead up to Christmas. This is when hedge funds pull out all the stops to make their calendar-year profits – and their annual bonus – as big as possible. Watch out for a drop later this year.
The Resource Sector’s Version of Apple?
There are some commodities, like silver, palladium and tin that, like Apple, have had spectacular runs, testing the nerves of investors along the way. Silver is up more than 600% in the last 10 years, and along the way has had periods where it has lost more than 60% in a few months, before recovering.
Silver – the commodity sector’s version of Apple
After a terrible 2010, silver is now up over 20% this year. You can see on the chart that it is normally after a slow 12 months that silver often has its next big move up, and it looks to me like this is starting to happen.
The reasons for silver prices to keep rising are still in place.
Part of my talk at our conference in Sydney last week was how to amplify your profits from these kind of commodity moves. I recommend holding physical silver, but it has only returned 15.7%, in Aussie-dollar terms, on average over the last 10 years.
That’s better than a slap in the face, but if you want to increase your gains, one option is to invest in silver stocks. In the time that Aussie-dollar silver has eked out a hard-earned 1% gain, an ASX-listed silver explorer I recommended to Diggers and Drillers readers last November has gained 111.1%. An incredible 15.1% of that was this morning alone.
OK, it’s not quite the 4000% that Apple has made in seven years. But 111.1% is not bad for just three months.
You Don’t Want to Miss This Boat
Just as it takes differing views to make a market, the views of the speakers at our conference differed. But one common message of the conference was that there is trouble brewing in China and we can’t rely on it to pick up the pieces ‘After America’.
I tend to be more bullish on China than my colleagues. But if I’m wrong and China IS going to crash in the coming years … all the more reason to try and profit from these small-cap miners right now and cushion the blow!
We may have missed the boat with Apple. But I still see plenty more opportunities in the oil, precious metals and agricultural small-cap space this year.
Dr. Alex Cowie
Editor, Diggers & Drillers
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March 21st, 2012 at 1:37 am
http://www.washingtonpost.com/business/in-reversal-chinese-artists-rail-against-alleged-us-piracy-and-target-apple/2012/03/19/gIQA98TsLS_story.html
My My how innovative Apple are.
March 21st, 2012 at 6:52 am
Silver is no different to any other asset or market. What’s the expression, concerning ‘holding on’ when the market goes against you? ” You’re either early…or plain wrong”. I’ll bet you could dig up a few stories of ‘being plain wrong’ to go with the one about your ‘holding on’ family and Apple!
March 21st, 2012 at 9:51 pm
Is it me or does the silver chart look a lot like the property charts?
Sorry, I forgot, property is in a bubble – whoops!!