Don't Let Captain Hindsight Pick Apart Your Portfolio!
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is a great Southpark episode where the "superhero" Captain Hindsight flies to the scene of a burning fire to save the day as the building occupants scream for help: "Those fire escapes should've been been built closer to the windows! And the nearest fire hydrant shouldn't have been two blocks away. And putting the extra coat of varnish on the outside of the building was a huge mistake!"
"Thank you Hindsight! Godspeed Captain Hindsight!" the relieved citizens and fire fighters coo as he takes back off into the air, ala superman, his cape blowing in the wind, as the building collapses.
Investors hail Captain Hindsight as a genius, and there are plenty of Hindsights roaming the broadcasts of CNBC, but listening to General Present generally goes against the grain, and most investors find it incredibly painful to do so.
Sometimes it can be incredibly simple for General Present to see the lay of the land. In 2005, I begged my brother not to purchase a house in the Los Angeles area, as to me it was obvious that we were in a housing bubble simply because there were truckers earning $30,000 a year being given $600,000 loans and house keys.
"How could they ever pay that off? When those teaser rates reset, the banks are going to foreclose, prices are going to go back down with the extra supply," I warned.
How many people listened to the warning signs? What happened to investors money as they kept investing in banks stocks? Lehman, Bear Stearns, Wachovia, where are they today? How about the stock prices of Citigroup and Bank of America, and what happened to the broader market during the following years?
I don't want your portfolio to be that burning building, so General Present is going to reiterate some analysis on your favorite companies she has stated before, that will win her far fewer popularity points than when Captain Hindsight arrives to clean up the mess.
Apple (NASDAQ: AAPL) loyalists will fight my opinion tooth and nail, and have called me various names, idiot being the kindest--
General Present states- in order to maintain the absurdly high profit margins on its hardware, the company must continue coming up with new super cool, cutting edge products that push the edges of technology as we know it. Products from Google, Samsung, and even Nokia and Microsoft are catching up to the vast lead that Apple once had. The iPad Mini, despite selling for $130 more than the Google Nexus and the Amazon Kindle, doesn't win most reviews.
When the original iPhone came out, it was an amazing leap in technology. Apple was able to charge a king's ransom for the phone, and people and the cell phone carriers gladly paid it. The iPhone 5 is still a great product, but many people think it's close to a coin flip between the Samsung Galaxy and the iPhone, and the winner depends on your particular tastes.
Now, when a competing product approaches the same quality- price enters into the picture. With the super high margins, there becomes room to drop the price. Based on this, Apple might be forced to drop prices, at the expense of its bottom line, to stay competitive.
Yes, I realize that some people are willing to pay more for Apple products simply because they are Apple. That cool factor, snob appeal, comes in part from society being mesmerized by Apple's continued ingenuity.
And let's give Apple the benefit of the doubt and say that they have another WOW product in the pipeline, however, the more time between such products, the more Apple's "cool appeal" (and thus pricing power) will seep away. I assure you this is a large part of the recent slide in share price.
Fact: Amazon (NASDAQ: AMZN) is in the process of losing its greatest advantage in Internet retail- the ability not to charge its customers sales tax. It is an economic fact that higher prices means fewer sales (law of supply and demand). CEO Jeff Bezos has done an admirable job growing Amazon, and a large part of the reason the price earnings ratio of nearing 3000 is because many investors understand the he is continually reinvesting Amazon's profits into new product lines and services.
However, with margins at just over 1%, they have no room to cut prices on the products they are selling. Many of their current and future sales will be transferred to companies like Wal-Mart online, or customers headed to various retail locations to get whatever they need today. (To combat this Amazon is building warehouses/ fullfillment centers closer to large population centers they weren't previously in, for tax purposes). That's not to say that Amazon isn't also the 800 pound gorilla of cloud services. I have heard some investors state Amazon is mostly a cloud play, but with a heavy investment in infrastructure; I believe this is inaccurate.
When sales growth starts to dip, as they invariably will, that price to earnings ratio of 3000 might start to look very scary.
This is much less of a warning, as Google (NASDAQ: GOOG) is definitely addressing this issue, but this is certainly a metric to watch. The simple fact is that humanity is going to be accessing the Internet more and more from tablets and cell phones than in previous years, and Google still derives 90% of its profits from advertising, mostly desktop.
A friend of mine works for an Internet advertising placing company was specifically told not to buy Google mobile ads because they don't do nearly as well as on the desktop. The company, despite the cheaper prices, still thought it wasteful. Another reason- security is not nearly as good on cell phones as it is on laptops, which certainly affects consumers purchasing decisions. As over 90% of Google's profits currently come from advertising, they're hard at work attempting, with their Android platform, to delve into mobile, and are certainly ahead of their competitors in this realm. However, the game is much more wide open than the desktop, and players like Apple with Siri, and Facebook, are trying to eat Google's lunch. I'm a big Google fan, have been since $500 a share, but I'd be adding a lot to my position if even twenty people I know told me they were comfortable buying things over their cell phones. This is yet to hapen, so watch out.
Let General Present leave you with a pleasant version of the future instead of fires. The world will see a rapid accelaration of robotics. You probably already know someone with the IRobot (NASDAQ: IRBT) Roomba (I have one and love it) and the company is trading at levels not seen since before the aftermath of the financial crisis, and has zero debt on its balance sheet. Shares have dropped as the US government has cut back on purchases of military robots, but I want to invest in the trend of robotics, the possibility of the company being aquired by a larger player, etc. General Present says the future is robots, with tremendous room for growth.
Captain Hindsight appears in all our lives at one point or another, and he can be a useful companion by allowing you to see mistakes you made/ things you didn't see in the past and to apply them to the now. Captain Hindsight is there to sharpen General Present's ability to analyze and make bold decisions today. Hopefully General Present is correct, because I don't want Captain Hindsight cleaning up my mess.
margiecfl has positions in Google, Apple, amd iRobot. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and iRobot . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.