* I am in no way recommending any particular stocks/investments in this article for anyone - This is just my personal opinion. Please do not act without doing your own research, consulting & deciding your own goals.
Imagine how many businesses have come & gone throughout the last 200 plus years of our nations existence. Imagine all the changes that not just the United States, but the world has gone through since July 4, 1776. The world was a totally different place, and only continued to change throughout the centuries and almost certainly will continue to do so for the next 200 years. Yet somehow, there are certain things that manage to prove timeless, that rise above the politics, agendas and hustle & bustle of everyday life. Despite a few amendment changes, the United States Constitution has endured for over 200 years relatively unchanged. For over 2000 years Christianity has survived and thrived despite a ever changing world. Even older than that are emotions people feel, ranging from love,anger, fear, happiness and joy; over 5000 years of civilization didn't change that.
As an investor this is one of the most important fundamental principles to understand, your not looking for quick gains, a hot tip, follow the leader, or speculate on nonsense; your trying to find the best businesses that will be able to survive, and thrive for a long time and not just protect there market share but continue to grow it as well. Many of the greatest companies of all time share similar attributes, and some have very unique ones as well.
A stock ALWAYS in the long run will move with profits! If the profits continue to rise, so will the stock & vice-versa. If the profits are erratic and inconsistent than the stock will always reflect IN THE LONG RUN.
This is one of the tricks to investing, you must be able to figure out where the future profits will come from and how much. There are many & I mean many different ways to figure out what future profits will be, but the problem is no matter what method you use (PE Ratios or throwing a dart at a wall blindfolded) you will ALWAYS be taking a GUESS!!!! Even Wall Street professionals, MBA students, and long time traders all they are doing is taking a guess as to what future profits will be. This is where one of the key aspects of investing comes into play, some businesses are just more predictable than others! A great example below comparing Apples Inc the most profitable, most admired and well known company on the planet to another equally as respected enterprise, The Coca-Cola Company......
Apple Inc is everything I stated before, with a 550 billion market capitalization it is the most valuable public company on earth. With a portfolio of devices everyone uses ranging from iphones, ipads, itunes, and pc's the company is one of the best in it's field. For many couples today, it is the number one long term holding in 401K(s) across the country mainly because they use there products and so they buy the stock. However, Apple for the long term (NOTE: when I speak long term, I'm talking a period of AT LEAST 4-5 years when designated, but mainly 10-15 years as the default, and anything beyond 15 I will make sure to say so) is one of the worst types of long term investments one can make based on some simple principles.....
This year what does Apple do to make money? Everything I mentioned above. It is very easy for most people to understand the products. So what's the problem? Simple......Even though I am not an Einstein I have noticed throughout my life, that people tend to have very short memories. Now let's flash back to 1996-97.....
I will ask you the same question as before....This year what does Apple do to make money? For most people this will be followed by a long "uhhhhhh..." before saying "I don't know" or "I'm not sure" or my personal favorite "Ran an Apple Orchard?" Don't get me wrong I love Apple, they have changed the world forever with there products but just because you love the product doesn't mean you should own the stock....Well come back to the question before in a little bit but first......
Failing to at least provide a sentence or two to answer this question demonstrates some key fundamental problems that MANY people fail to do when investing....
They never bother to look into the history of the company. This usually only takes a quick visit to Google to type in the company name followed by "History" in the search bar. This is than followed by another quick step of about 5-10 minutes of just reading the companies history on there website in the "About Us" section. This will usually give you a better understanding of why the company does what it does, how it has handled adversity in the past, and can usually help spot as Peter Lynch once called it a "Diworsification" (more on that another time).
They only focus on the here & now. Imagine you are transported back in time to 1910, the most popular stock everyone owns is not Apple but a company called U.S. Steel Company. Everyone thought U.S. Steel would continue to be the best and one of the most powerful companies in the world FOREVER. Today U.S. Steel is but a mere shell of what it once was. Flash forward to the year 1919, Henry Ford's Model T is the most popular car in the country, EVERYONE can afford one and has one. Mr. Ford's position in the automotive industry looks untouchable. Only a mere 10 years later Ford Motor Company had ceased operations temporarily to restructure as they began to lose large chunks of market share to a surging turnaround story in General Motors Corporation. There are many other examples throughout the decades of companies that people thought they could stay on top forever & couldn't imagine a world where they weren't still. While there are ALWAYS exceptions of winners that are able to stay on top or continue to be a top leader in there respective field they don't apply universally. From the once mighty Bethlehem Steel, Eastman-Kodak Corporation, Sears-Roebuck & Company, Woolworth Corporation, BlackBerry Ltd., Myspace.com and everything in between. There is no shortage to warn investors not to just buy a company believing since it is on top now it always will be. Yet the amount of people that continue to make this mistake is astounding.But even these two pale in comparison to the final mistake....
They fail to know whether the profits are predictable. Coming back to the question before, "This year what does Apple do to make money?" the year period being 1996-97, the answer is shocking to many people...They don't make money! In fact there on the verge of bankruptcy!! Back in 1996 Apple was a complete disaster, with terrible leadership, absolutely confusing/too complex products that even hardcore tech geeks couldn't understand fully, and bad products (some argue that the products were ahead of there time). Either way the company was losing VASTS amounts of money for the last few years and was at wits end with what to do. The product line of Apple in the 90's included: The Apple Newton (90's version of a ipad), CD players, Digital Cameras, printing machines, ANS, floppy disk drives, and the Macintosh (several software programs that were sold are derivatives of programs still used today, but VASTLY different for the most part, sharing only the blood line). Point being, the 2014 Apple & the 1996 Apple are not even the same companies!!! The only thing they share is the Mac!! No one could have predicted what Apple would turn into 15 years later because in the technology field things change so quickly (2-3 years) it's almost unpredictable. Think cell phones, beepers, computers, tablets, Bluetooth, walk mans, the internet, game consoles and the like. The changes are so radical, that one company can be on top today, and be gone only 2 years later!!! So this leads me to these questions......
What will Apple look like 10 years from now?
What will Apple look like 15 years from now?
What will Apple look like 20 years from now?
What will Apple look like 30 years from now?
What will Apple look like 50 years from now?
No matter whether you are a High School valedictorian or a dropout, a working mom with 2 kids, or a young father with a mortgage, or a rocket scientist or a Wall Street analyst with over 20 years experience, No one can answer these questions without resulting to pointless speculation, with no real facts or history to back them up. Sure the company may still make the Mac 30 years from now, but that is not the main cash crop for Apple, the iphone is 60% of sales while the Mac is in the single digits. Sure you very realistically could predict the future profits for Apple for the next 2-3 years (The absolute limit for dealing with technology companies like Apple) but you will not make 5 times your money or become a millionaire quickly. The most you can expect is to double your money if the company is fairly priced. Yes you could get apple at a fire sale price that provides you a BIG margin of safety for decades to come but that's not a realistic scenario, if it does happen so be it. Too many people hope to retire on a beach in Central America, or a be able to change there zip code to 90210 when they invest in a company of Apple's size and ever changing industry. When you invest, even though you are taking a guess, your basis for your estimates must have facts and reasonable assurances and expectations attached to them as well!! It is foolish to believe iphones and tablets will be the companies main money source decades from now. It is foolish to believe you will make 20 fold on your money in 10 years on a company of Apple's size at fair price, it is foolish to believe you can predict the company beyond 2-3 years looking at the history of the company and the industry it operates in as a whole. Once you understand what to expect and what you are buying you can truly begin to invest.
I will compare this to a company like The Coca-Cola Company applying the same fundamentals in the second part.
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