For Entrepreneurs and Investors, Discovering Truth Takes Time

 

For Investors, Discovering Truth Takes Time

 CFA

 

The Roman philosopher, playwright, statesman and occasional satirist Lucius Annaeus Seneca wasn’t talking about the stock market when he wrote that “time discovers truth,” but he could have been. In the long run a stock price will reflect a company’s (true) intrinsic value. In the short run the pricing is basically random.

Here are two real-life examples:

Let’s say you had the smarts to buy Microsoft in November 1992. It would have been a brilliant decision in the long run — the software giant’s stock has gone up manyfold since. But nine months later, in August 1993, that call did not look so brilliant: Microsoft shares had declined 25 percent in less than a year. In fact, it would have taken you 18 months, until May 1994, for this purchase to break even. Eighteen months of dumbness?

In the early ’90s the PC industry was still in its infancy. Microsoft’s DOS and Windows operating systems were de facto standards. Outside of Macs and a tiny fraction of IBM computers, every computer came preinstalled with DOS and Windows. Microsoft had a pristine balance sheet and a brilliant co-founder and CEO who would turn mountains upside down to make sure the company succeeded. The above sentence is infested with hindsight — after all, that was almost 30 years ago. But Microsoft clearly had an incredible moat, which became wider with every new PC sold and every new software program written to run on Windows.

Here is another example. GoPro is a maker of video cameras used by surfers, skiers and other extreme sports enthusiasts. If you had bought the stock soon after it went public, in 2014, you would have paid $40 a share for a $5.5 billion–market-cap company earning about $100 million a year — a price-earnings ratio of about 55. Your impatience would, however, have been rewarded: The stock more than doubled in just a few short months, hitting $90.

Would it have been a good decision to buy GoPro? The company makes a great product — I own one. But GoPro has no moat. None. Most components that go into its cameras are commodities. There are no barriers to entry into the specialized video camera segment. Most important, there are no switching costs for consumers. Investors who bought GoPro after its IPO paid a huge premium for the promise of much higher earnings from a company that might or might not be around five years later.

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What is even more interesting is that some of those buyers were then selling to even bigger fools who bought at double the price a few months later. GoPro was a momentum stock that was riding a wave about to break. Fast-forward a year and GoPro sales are collapsing, so now the stock is trading in the low teens ($11.65 as of this writing).

These two examples bring us to the nontrivial topics of complex systems and nonlinearity. My favorite thinker, Nassim Taleb, wrote the following in his book Antifragile: Things That Gain from Disorder: “Complex systems are full of interdependencies — hard to detect — and nonlinear responses. ‘Nonlinear’ means that when you double the dose of, say, a medication, or when you double the number of employees in a factory, you don’t get twice the initial effect, but rather a lot more or a lot less.”

The stock market is a complex system where in the short term there are few if any interdependencies between decisions and outcomes. In the short run stock prices are driven by thousands of random variables. Stock market participants have different risk tolerances and emotional aptitudes, and diverse time horizons ranging from milliseconds (for high-speed traders) to years (for long-term investors).

Assessment

In other words, predicting where a stock price will be in a day, a month or even a year is not much different from prognosticating whether the ball on a roulette wheel will land on red or black. In the longer run, however, good decisions should pay off because fundamentals will shine through — just as was the case with buying Microsoft in 1992 and not buying GoPro in 2014. But in the short run there is no correlation between good decisions and results. None!

Whenever you look at your portfolio, think of the Microsoft and GoPro examples above. The performance of your stocks in the short run tells you absolutely nothing about what you own or about the quality of your decisions. You may own a portfolio of Microsofts, and its value is still going down because at this juncture the market doesn’t care about Microsofts. Or maybe you stuffed your retirement fund with overpriced fads that may not be around a year from now. But in the longer run, which always lies out there past the short run, time discovers truth, as Seneca said.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

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MORE FOR DOCTORS AND NURES:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

UPDATE: The Markets, Federal Reserve and Omicron

By Staff Reporters

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Markets: Stocks were in the green yesterday until Fed Chair Jerome Powell explained that the Federal Reserve Open Market Committee was planning to start hiking interest rates in March to combat soaring inflation. Then, they tanked and Treasury yields rose sharply higher. Microsoft still had a solid day after its superb earnings report offered bullish signs for the entire software industry. But, stock markets in Asia tumbled to their lowest in nearly 15 months after America’s central bank chief confirmed widely expected plans to tackle higher inflation with an increase in interest rates this year, beginning in March. And finally, Cryptos got crushed, again!

FOMC: “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” said Chairman Powell.

Omicron: The Food and Drug Administration pulled its authorization of two of the most-used monoclonal antibodies to treat COVID-19 this week, leaving doctors with fewer options to help their patients avoid the hospital. Related: https://www.cdc.gov/coronavirus/2019-ncov/vaccines/different-vaccines.html?s_cid=11305:%2BModerna%20%2B%20%2Bcovid%20%2Bvaccine:sem.b:p:RG:GM:gen:PTN:FY21

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UPDATE: Stock Markets, the Economy and Pandemic

By Staff Reporters

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SPONSOR: http://www.CertifiedMedicalPlanner.org

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  • Stock Markets: US stocks staged a big afternoon comeback for the second day in a row … but still not big enough to close in the green. American Express was the top performer in both the S&P and the Dow after the company reported its highest billings volume ever in Q4. And, enthusiasm over meme stocks more broadly appears to be dwindling along with cryptos. And, while NASDAQ took a hit, Microsoft reported quarterly sales of more than $50 billion for the first time ever.
  • Economy: The weight of the financial world is on Jerome Powell’s shoulders today. The Federal Reserve chair will provide an update on the central bank’s views on sky-high inflation and its plan for interest rate hikes this year (though none are expected until March).
  • Pandemic: Pfizer and BioNTech started clinical trials for an Omicron-specific vaccine yesterday. The results will help the pharma partners decide whether to replace their current jab formula with one that targets the most dominant Covid variant. The new vaccine is being tested both as a three-shot series for un-vaccinated participants and as a booster for the already vaccinated.
  • CITE: https://www.r2library.com/Resource/Title/082610254

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Stock MARKET Update

ALL TIME HIGHS?

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  • Markets: The S&P begins the week after closing at an all-time high last Friday. The index has closed at a record more times this year (67) than in any other year since 1995. It needs 10 more to tie the mark.
  • More S&P fun facts: Microsoft, Alphabet, Apple, Nvidia, and Tesla alone account for over a third of the S&P’s gains this year.
  • CITE: https://www.r2library.com/Resource/Title/082610254

NOTE: 35,630.18market open‎-340.81 (‎-0.95%)as of 12/13/2021, 11:31 AM EST

COMMENTS APPRECIATED.

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Thank You

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PODCAST: Microsoft Buys Nuance; IPOs

By THCB

Today on Health in 2 Point 00, Jess DaMassa claims to be blameless for the drama between Jonathan Bush and Glen Tullman. On Episode 198, we talk about Microsoft buying Nuance for $16 billion and $3 billion in debt – is Microsoft taking over healthcare, and is this going to slow Nuance down?

IPOs

Cohere Health raises $36 million in a Series B, working on improving prior authorizations between health plans and providers. We wrap up with a lightning round of IPO rumors regarding Privia Health, VillageMD, and Bright Health.

MORE: https://thehealthcareblog.com/blog/2021/04/13/healthin2point00-episode-198-microsoft-buys-nuance-lots-of-ipo-rumors/

Your thoughts are appreciated.

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40 Years – MICROSOFT Corp.

Microsoft's biggest moments throughout the years in a chart

https://images.routledge.com/common/jackets/amazon/978148224/9781482240283.jpg

ASSESSMENT: Your thoughts are appreciated.

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On Bill Gates, Doctors and Divorce – Oh My!

OF COMMON CAUSE WITH TOO MANY PHYSICIANS?

DEM avatar

Dr. David Edward Marcinko MBA CMP®

SPONSORED: http://www.CertifiedMedicalPlanner.org

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Bill Gates has been a business hero for me for the past 35 years. I even met him, once briefly back in the day. So, the marital union of the Microsoft Founder and Melinda French seemed perfect, and their marriage stood the test of time as it neared the three-decade mark, a rare feat in the world of A-list couples.

Sadly, when they announced their split on Twitter this week, many were shocked, even heartbroken. People reflected on their own marriages and wondered how they could make it work if the Gates’ could not.

And collectively, we found we cared about the split — a lot. 

But, what about physician colleagues and divorce?

Do we doctors have some common cause with Bill and Melinda?

Divorce for Physicians What You Should Know - bidti.org

MEDIATION: https://medicalexecutivepost.com/2016/02/11/a-step-wise-approach-to-the-divorce-mediation-process-for-mds/

QDRO: https://medicalexecutivepost.com/2008/05/19/what-is-a-qdro/

SETTLEMENTS: https://medicalexecutivepost.com/2008/05/28/doctors-and-divorce-settlements/

PRACTICE VALUE: https://healthcarefinancials.files.wordpress.com/2011/12/medical-practice-valuation-blunders1.pdf

BUY-SELL: https://medicalexecutivepost.com/2008/07/03/marital-dissolution-buy-sell-agreements-and-practice-value/

GREY DIVORCE: https://medicalexecutivepost.com/2019/10/21/older-divorcing-medical-professionals/

ASSESSMENT: Your thoughts are appreciated

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Thinking Differently about DYSLEXIA

Take the “Made By Dyslexia” Pledge!

Courtesy: http://www.CertifiedMedicalPlanner.org

DEM5

By Dr. David Edward Marcinko MBA

[ME-P Publisher-in-Chief]

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I’ve been a big fan of Bill Gates and the Microsoft Corporation since it first went public. Maybe not so much for Steve Ballmer. And, of course, very saddened by the recent death of co-founder Paul Allen https://www.paulallen.com/

But, as a physician and board certified surgeon; stock-broker, insurance agent, Registered Investment Advisor [RIA], reformed Certified Financial Planner® and Certified Medical Planner®; as well as appointed professor of economics and finance, medical educator and human being, I have never been more proud of MSFT, and CEO Satya Narayana, after learning of this new didactic initiative. Here is why?

“Microsoft + Made by Dyslexia”

Did you know that the “Microsoft + Made by Dyslexia” is helping dyslexic students thrive with technology? https://educationblog.microsoft.com/2018/10/microsoft-made-by-dyslexia-help-dyslexic-students-thrive/#oXg7GGHaHdS7wvep.99

Definition:

Dyslexia, also known as reading disorder, is characterized by trouble with reading despite normal intelligence. Different people are affected to varying degrees. Problems may include difficulties in spelling words, reading quickly, writing words, “sounding out” words in the head, pronouncing words when reading aloud and understanding what one reads. Often these difficulties are first noticed at school. When someone who previously could read loses their ability, it is known as alexia. The difficulties are involuntary and people with this disorder have a normal desire to learn.

Therefore, the ”Made By Dyslexia” pledge is for companies, teachers, professors, educators and governments to pledge to value dyslexic thinking, and to begin taking positive steps towards supporting it.

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Assessment

Rest assured,  I am ashamed to say I know little about dyslexia. I am not a communication disorders or special education expert; so Mea Culpa!

Nevertheless, I urge you to  take the pledge! I have.

For more information, please email: info@madebydyslexia.org.

More: http://madebydyslexia.org/ 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

About USAFACTS.com

About the Website: USAFACTS.com

By Staff Reporters

Principles

USAFacts is a new data-driven portrait of the American population, our government’s finances, and government’s impact on society. They are a non-partisan, not-for-profit civic initiative and have no political agenda or commercial motive. They provide this information as a free public service and are committed to maintaining and expanding it in the future.

USA FACTS rely exclusively on publicly available government data sources. They don’t make judgments or prescribe specific policies. Whether government money is spent wisely or not, whether our quality of life is improving or getting worse – that’s for you to decide. They hope to spur serious, reasoned, and informed debate on the purpose and functions of government. Such debate is vital to our democracy. They hope that USAFacts will make a modest contribution toward building consensus and finding solutions.

More

There’s more to USAFacts than their website. They also offer an annual report, a summary report, and a “10-K” modeled on the document public companies submit annually to the SEC for transparency and accountability to their investors.

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Innspiration

USAFacts was inspired by a conversation Steve Ballmer [former CEO Microsoft Corporation] had with his wife, Connie. She wanted him to get more involved in philanthropic work. He thought it made sense to first find out what government does with the money it raises.

Assessment

Where does the money come from and where is it spent? Whom does it serve? And most importantly, what are the outcomes?

Visit: http://www.USAFACTS.com

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Do RetroSpective Thoughts on Apple Inc Hint of the ProSpective Future after the “Crash” Today?

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PART I.

Understanding Apple Requires an Analysis of Fundamentals and Psychology

vitalyBy Vitaliy Katsenelson CFA

So many articles have been written recently about Apple — defending it or explaining why this glorious fruit will turn into a shriveling pumpkin by midnight (with Samsung’s help) — that I really haven’t felt the need to contribute to the unending debate.

But, when Apple’s stock crashed to $450 back in January 2013, we bought a little for our clients. After receiving an outraged e-mail from one of them calling the purchase “irresponsible” and proclaiming that everyone (including his neighbor) knows that Apple is going down to $300, I decided it was time to join the discourse. Clients rarely (almost never) contact us about stocks we own in their accounts. More important, this is far from the most “radioactive” stock we own or have owned.

So, here is a column on Apple, I wrote back then.  I have no intention of defending or prosecuting the company, but I would like to share some thoughts about it that many pundits have either overlooked or ignored.

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Logo of Apple Inc. to be used on a custom landing page/brand page about Apple products on the website of Shopping.com.

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The Psychlogy

What makes Apple stock difficult to own is psychology. The company’s success since 2000 is a black swan. We tend to think of Nassim Nicholas Taleb’s black swans as significant random negative events, but Apple is a positive one. When co-founder Steve Jobs came back to the company in the late ’90s, Apple was about to take its last breath. Jobs pulled off a miracle. He revived the company’s computer product line, making Macs exciting again, and then came out with three revolutionary “i” products in a row: the iPod, iPhone and iPad. You could argue that the success of each “i” product in itself was a black swan, exceeding all rational expectations and revolutionizing, transforming and in some cases creating new categories of merchandise that had never existed before.

Revenue and Market Capitalization

Apple’s revenue and market capitalization deservedly surpassed those of almighty Microsoft Corp. — the hairy monster with stinky breath that performed CPR on dying Apple in the late ’90s by injecting liquidity into the company by buying its preferred stock. We have a hard time processing this highly improbable success and an even harder time imagining that there is another black swan about to take flight from the Apple labs, especially with no Steve Jobs around to sit on the egg.

Black swans come out of nowhere, unannounced, but their impact may be long-lasting. The wildly successful “i” gadgets dug a formidable moat around Apple. They created the most valuable and still most inspirational brand in the world, funded an enormous research and development effort, enabled huge buying power (Apple locks up supply and pays much lower prices than many of its competitors for parts), filled out a mature product ecosystem and stuffed Apple’s debt-free balance sheet with $137 billion — half the market capitalization of Microsoft. The moat is wide, deep and unlikely to be breached any time soon.

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Ex-Cathedra black swan

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High Price

One reason the psychology of owning Apple stock is so difficult: it’s high price. (Note: I am talking not about its valuation but purely about its price.) Apple has had only one stock split since the late ’90s, when it was trading in double digits, and it now changes hands at about $450 (down from $700 just a few months ago). Stock splits create zero economic value in the long run — absolutely none. Apple could split its stock ten to one and you’d have ten $45 shares, and nothing about the company or its business would change. But, I’d argue that a 3 percent “slide” of $1.35 would grab fewer headlines than a $13.50 “drop” — there is a media magnification factor that is hard to ignore.

Hardware versus Software

Is Apple a hardware or a software company? This is a very important question because Apple’s net margins of 25 percent are dangerously higher than those of Microsoft, a software monopoly that, with the minor exception of the Xbox and its new venture into tablets, sells only software, which has a 100 percent incremental margin.

Apple is either a smart hardware company or a software maker dressed in hardware company clothes. Take a look at the PC businesses of traditional “dumb” hardware companies like Dell and Hewlett-Packard Co. (I am not insulting these companies, I am just highlighting their lack of PC-directed R&D.) They buy hard drives from Western Digital Corp., graphic cards from Nvidia Corp., processors from Intel Corp. and an operating system from Microsoft, then they have contract manufacturers put together these parts in Asia and ship PCs all over the world. Dell and HP engineers design the PCs but contribute minimal R&D to their boxes; most of the R&D is done by the suppliers. Dell and HP are really asset-lite marketing and logistics companies — this explains their razor-thin margins. (Side note: Because of a lack of fixed costs, Dell and HP can remain profitable despite the ongoing decline in PC sales.)

Same Surface

On the surface, Apple’s personal computer business is not that much different from Dell’s or HP’s: It uses the same highly commoditized hardware and it also outsources manufacturing, but Apple spends much more on the R&D of its own operating system and creates distinctive, innovative products. Apple gets to keep a slice of revenue that would otherwise go to Microsoft for the operating system. Also, Apple is able to charge a premium (usually a few hundred dollars per PC) for the aesthetic appeal and perceived ease of use of its products.

However, when it comes to the “i” devices, Apple is a much smarter hardware company; its value added goes further than just basic design and software. Though there is a lot of commoditized hardware that goes into an iPhone or iPad, Apple’s skill at fitting an ever-growing number of components into ever-shrinking devices constantly increases. Add world-class touch and feel, superior battery life and durability, and you have a package that turns what would otherwise be commodity items into highly differentiated, and undeniably sexy, products. Apple has even gone a step further and is designing its own microprocessors.

But — and this is a very important “but” — as phones and tablets mature, processor speed, battery life and weight will tend to become uniform across all devices. It is arguable that the competition has already caught up with Apple in the hardware race. As the hardware premium goes away, there will be only two premiums left: Apple’s brand and its ecosystem. (I will go into detail about the “i” ecosystem and what it means for Apple’s margins and profitability in my second essay posted below).

Note that I did not mention the software premium. Unlike Microsoft, which charges for the Windows operating system installed on PCs, Google gives away Android to anyone who dares to make a phone or a tablet. Unless Apple can maintain the operating system lead against Android, that premium will go away.

Assessment

Recently, I spent a few days playing with Nexus 7, Google’s Android-powered 7-inch tablet, which retails for $200 ($130 cheaper than Apple’s iPad mini). Nexus 7 is a good product, but I kept remembering that humans and monkeys share 98 percent of their DNA, and the Android operating system is missing the 2 percent that makes Apple iOS so special.

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PART II.

How Much Would You Pay for the Apple Ecosystem?

Apple’s ecosystem is an important and durable competitive advantage; it creates a tangible switching cost (or, an inconvenience) after Apple has locked you into the i-ecosystem. It takes time to build an ecosystem that consists of speakers and accessories that will connect only via Apple systems: Apple TV, which easily recreates an iPhone or iPad screen on a TV set; the music collection on iTunes (competition from Spotify and Google Play lessens this advantage); a multitude of great apps (in all honesty, gaming apps have a half-life of only a few weeks, but productivity apps and my $60 TomTom GPS have a much longer half-life); and, last, the underrated Photo Stream, a feature in iOS 6 that allows you to share photos with your close friends and relatives with incredible ease. My family and friends share pictures from our daily lives (kids growing up, ski trips, get-togethers), but that, of course, only works when we’re all on Apple products. (This is why Facebook bought Instagram for $1 billion. Photo Stream is a real competitive threat to Facebook, especially if you want to share pictures with a limited group of close friends.)

The i-ecosystem makes switching from the iPhone to a competitor’s device an unpleasant undertaking, something you won’t do unless you are really significantly dissatisfied with your i-device (or you are simply very bored). How much extra are you willing to pay for your Apple goodies? Brand is more than just prestige; it is the amalgamation of intangible things like perceptions and tangible things like getting incredible phone and e-mail customer service (I’ve been blown away by how great it is!) or having your problems resolved by a genius at the Apple store.

Of course, as the phone and tablet categories mature, Apple’s hardware premium will deflate and its margins will decline. The only question is, by how much?

Let me try to answer

From 2003 to 2012, Apple’s net margins rose from 1.1 percent to 25 percent. In 2003 they were too low; today they are too high. Let’s look at why the margins went up. Gross margins increased from 27.5 percent to 44 percent: Apple is making 16.5 cents more for every dollar of product sold today than it did in 2001. Looking back at Nokia Corp. in its heyday, in 2003 the Finnish cell phone maker was able to command a 41.5 percent margin, which has gradually drifted down to 28 percent.

Today, Nokia is Microsoft’s bitch, completely dependent on the success of the Windows operating system, which is far from certain. Nokia is a sorry shell of what used to be a great company, while Apple, despite its universal hatred by growth managers, is still, well, Apple. Its gross margins will decline, but they won’t approach those of 2003 or Nokia’s current level.

For Apple to conquer emerging markets and keep what it has already won there, it will need to lower prices. The company is not doing horribly in China — its sales are running at $25 billion a year and were up 67 percent in the past quarter.

However, a significant number of the iPhones sold in China (Apple doesn’t disclose the figure) are not $650 iPhone 5’s but the cheaper 4 and 4s models. (Also, on a recent conference call, Verizon Communications mentioned that half of the iPhones it has sold were the 4 and 4s models.) Apple’s price premium over its Android brethren is not as high as everyone thinks.

What is truly astonishing is that Apple’s spending on R&D and selling, general and administrative (SG&A) expenses has fallen from 7.6 percent and 19.5 percent, respectively, in 2003 to a meager 2.2 percent and 6.4 percent today. R&D and SG&A expenses actually increased almost eightfold, but they didn’t grow nearly as fast as sales. Apple spends $3.4 billion on R&D today, compared with $471 million in 2001. This is operational leverage at its best. As long as Apple can grow sales, and R&D and SG&A increase at the same rate as sales or slower, Apple should keep its 18.5 percentage points gain in net margins through operational leverage.

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Growth of sales is an assumption in itself. Apple’s annual sales are approaching $180 billion, and it is only a question of when they will run into the wall of large numbers. At this point, 20 percent-a-year growth means Apple has to sell as many i-thingies as it sold last year plus an additional $36 billion worth. Of course, this argument could have been made $100 billion ago, and the company did report 18 percent revenue growth for the past quarter, but Apple is in the last few innings of this high-growth game; otherwise its sales will exceed the GDP of some large European countries.

If you treat Apple as a pure hardware company, you’ll miss a very important element of its business model: recurrence of revenues through planned obsolescence. Apple releases a new device and a new operating system version every year. Its operating system only supports the past three or four generations of devices and limits functionality on some older devices. If you own an iPhone 3G, iOS 6 will not run on it, and thus a lot of apps will not work on it, so you will most likely be buying a new iPhone soon. In addition — and not unlike in the PC world — newer software usually requires more powerful hardware; the new software just doesn’t run fast enough on old phones. My son got a hand-me-down iPhone 3G but gave it to his cousin a few days later — it could barely run the new software.

As I wrote above, Apple’s success over the past decade is a black swan, an improbable but significant event, thanks in large part to the genius of Steve Jobs. Today investors are worried because Jobs is not there to create another revolutionary product, and they are right to be concerned. Jobs was more important to Apple’s success than Warren Buffett is to Berkshire Hathaway’s today. (Berkshire doesn’t need to innovate; it is a collection of dozens of autonomous companies run by competent managers.) Apple will be dead without continued innovation.

Jobs was the ultimate benevolent dictator, and he was the definition of a micro-manager. In his book Steve Jobs, Walter Isaacson describes how Jobs picked shades of white for Apple Store bathroom tiles and worked on the design of the iPhone box. He had to sign off on every product Apple made, down to and including the iPhone charger. His employees feared, loved and worshiped him, and they followed him into the fire. Jobs could change the direction of the company on a dime — that was what it took to deliver black i-swans. Jobs is gone, so the probability of another product achieving the success of the iPhone or iPad has declined exponentially.

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Steve Jobs RIP

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What is really amazing about Apple is how underwhelming its valuation is today — it doesn’t require new black swans.

In an analysis we tried very hard to kill the company. We tanked its gross margins to a Nokia-like 28 percent and still got $30 of earnings per share (the Street’s estimate for 2013 is $45), which puts its valuation, excluding $145 a share in cash, at 10 times earnings. We killed its sales growth to 2 percent a year for ten years, discounted its cash flows and still got a $500 stock.

There is a lot of value in Apple’s enormous ability to generate cash. The company is sitting on an ever-growing pile of it — $137 billion, about one third of its market cap. Over the past 12 months, despite spending $10 billion on capital expenditures, Apple still generated $46 billion of free cash flows. If it continues to generate free cash flows at a similar rate (I am assuming no growth), by the end of 2015 it will have stockpiled $300 of cash per share. At today’s price [2013] it will be commanding a price-earnings ratio (if you exclude cash) of 4.

Of course, the market is not giving Apple credit for its cash, but I think the market is wrong. Unlike Microsoft, which does something dumber than dumb with its cash every other year, Apple has a pristine capital allocation track record. It has not made any foolish acquisitions — or, indeed, any acquisitions of size. Other than buying an Eastern European country and renaming it i-Country, Apple will not be able to acquire a technologically related company of size, nor will it want or need to. The cash it accumulates will end up in shareholders’ hands, either through dividends or share buybacks.

What is Apple worth?

After the financial acrobatics I’ve done trying to murder the valuation of Apple, it is easier to say that it is worth more than $450 than to pinpoint a price target. When I use a significantly decelerating sales growth rate and normalize margins (reducing them, but not as low as Nokia’s current margins), I get a price of about $600 to $800 a share.

Growth managers don’t want Apple to pay a large dividend, as though that would somehow transform this growing teenager into a mature adult. But I have news for them: Apple already is a mature adult. Second, when your return on capital is pushing infinity (as Apple’s is), you don’t need to retain much cash to grow. Two thirds of Apple’s cash is offshore, but that doesn’t make it worthless; it just makes it worth less — only $65 billion, maybe, not $97 billion, once the company pays its tax bill to Uncle Sam.

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ImageProxy

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Assessment

In the short term none of the things I am writing about here will matter. Remember, “Everyone knows Apple is going to $300,” as a client recently e-mailed me, as everyone knew it was going to a $1,000 a few months ago when Apple’s stock was trading at $700. The company’s stock will trade on emotion, fundamentals will not matter, and growth managers will likely rotate out of Apple, because once the stock declined from $700 to $450, the label on it changed from “growth” to “value.”

But ultimately, fundamentals will prevail. Like the laws of physics, they can only be suspended for so long. And so, do these retrospective thoughts on Apple hint of future prospects?

More: Should You Buy Apple Stock Ahead of Its September Event

ABOUT

Vitaliy N. Katsenelson CFA is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books were translated into eight languages.  Forbes Magazine called him “The new Benjamin Graham”.  

Conclusion

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Microsoft Corporation from Research to Development

Collaboration is the secret sauce of delivering new technologies

By Staff Reporters

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U.K. Researcher Garners TR35 Accolade

Pioneering research into programming biology has earned a Microsoft Research scientist a prestigious TR35 award, presented by Technology Review.

BC at MSFT RC

Andrew Phillips, a 34-year-old scientist who leads the Biological Computation group at Microsoft Research Cambridge, received the award, given each year by Technology Review to recognize the world’s top innovators under the age of 35. The awards span energy, medicine, computing, communications, nanotechnology, and other fields.

Link: http://research.microsoft.com/en-us/news/features/phillipstr35-082311.aspx

How they do it?

Here is a glimpse at the transfer of ideas and research that happens every day at Microsoft.

Source: blogs.technet.com

Assessment

Now, here is a thought from a former physician Microsoftie on our own ME-P and iMBA Inc, achievements.

Link: https://medicalexecutivepost.com/2008/02/29/ahmad-hashem-md-phd

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Good Night H. Ed Roberts MD

Medical Inventor, Bio-Engineering Pioneer and Colleague

[September 13, 1941 – April 1, 2010]

By Dr. David Edward Marcinko; MBA

[Publisher-in-Chief]

According to Wikipedia, Henry Edward “Ed” Roberts MD was an American engineer, entrepreneur and medical doctor who designed the first commercially successful personal computer in 1975. He is most often known as the “father of the PC.” He founded Micro Instrumentation and Telemetry Systems [MITS]) in 1970 to sell electronics kits to model rocketry hobbyists, but the first successful product was an electronic calculator kit that was featured on the cover of the November 1971 issue of Popular Electronics magazine. The calculators were very successful and sales topped one million dollars in 1973. But, a brutal calculator price war left the company deeply in debt by 1974. Roberts then developed the Altair 8800 personal computer that used the new Intel 8080 microprocessor. This was featured on the cover of the January 1975 issue of Popular Electronics, and hobbyists flooded MITS with orders for this $397 computer kit. Bill Gates and Paul Allen joined MITS to develop software and Altair BASIC was Microsoft’s first product. Roberts sold MITS in 1977 and retired to Georgia where he farmed, studied medicine and eventually became a small-town doctor after commencing medical school at age 39.

Link: http://en.wikipedia.org/wiki/Ed_Roberts_(computer_engineer)

My Connection to Ed

Almost 20 years ago, I co-founded a small medical education software company, for a tiny niche market. My partner was a computer “whiz kid”. I was the chief executive, brain-child and enfant terrible. We are still in business today.

Nevertheless, I decided to contact Ed because I had just received my first PC [Intel® 286 microprocessor] from a publishing company who had contracted with me to write a medical textbook; remember DOS and WordPerfect? I was also very familiar with Microsoft lore, especially relative to business thought and competitive analysis. Regular readers of the ME-P may even recall my mention of attending lectures by Michael Porter PhD [father of competitive analysis] while dating a girl who was attending Wharton Business School while I was a medical student in Philadelphia, back-in-the-day.

Anyway, I took it upon myself to write Ed for some advice. Remember, this was before the commercial internet was widely available. I used medicine as a mutual point of interest. Anyway; after no response, the incident was quickly forgotten because of a busy lifestyle, new medical practice, book-project, etc. I follow-upped about a year later and this time received an encouraging written reply from Ed. I treasure the letter to this day, almost as much as the ones I have from Louis Rukeyser [TV fame-died in 2006] and his uber-investor guest, Sir John Marks Templeton [son is a surgeon] who died in 2008. In 2005, Templeton wrote a brief memorandum predicting that within five years there would be financial chaos in the world. It was eventually made public in 2010.

Assessment

Ed practiced as an internist until his death, in Cochran – a city near Macon, GA. The population was 4,455 at the 2000 census. It is a very poor county in South Georgia, and many, if not most of Ed’s patients were on Medicaid and/or Medicare. He loved them dearly, and they loved him, too!

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Although perhaps not as famous as Gates and Allen; we say with all due respect and admiration – good night Dr. Roberts – and thank you for the personal computer … your love of medicine and mankind … and for reaching out to me so very long ago!

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About Microsoft HealthVault Community Connect

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Connecting Hospitals with Patients and Referring Physicians

[By Staff Reporters]

At the recent 2010 Annual Healthcare Information and Management Systems Society (HIMSS) Conference & Exhibition here in Atlanta, Microsoft announced Microsoft HealthVault Community Connect, a new software solution for hospitals designed to help them improve care coordination and engage patients and their families in managing their own health.

Improving Coordination of Care

HealthVault Community Connect reports to enable hospitals to give patients and referring physician’s access, after discharge, to electronic copies of the patient’s personal health data generated at the hospital. The product also lets patients pre-register for hospital appointments online using their electronic personal health information to populate hospital forms in advance.

Assessment

Microsoft HealthVault Community Connect lets hospitals exchange electronic patient health information with patients and referring doctors. The new solution is scheduled to be available in the third quarter of 2010.

http://www.microsoft.com/presspass/press/2010/mar10/03-01MSMiamiPR.mspx

Conclusion

So, give em’ a click and tell us what you think.

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Spotlight on the “Health Tech Today” Video Launch

Video Clip from Microsoft

By Staff ReportersConnected Doctor Health 2.0

Health Tech Today is a new monthly, on-line video series at the intersection of health and information technology.  The show premiers November 10th 2009, but you can view a video trailer of their first show on the link below, right now

HealthBog

HealthBlog includes thoughts, comments, news, and reflections about healthcare IT from Microsoft’s worldwide health senior director Bill Crounse MD, on how information technology can improve healthcare delivery and services around the world.

Link: http://blogs.msdn.com/healthblog/default.aspx

Assessment

Please help them spread the word. Blog about it. Tweet your friends. Post information about Health Tech Today on Facebook.  Health IT has a new voice. We think you’ll like what you see.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. So, give em’ a click and tell us what you think! Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Improving Patient Control of eHRs

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Traditional Command-Control Option Dying Out … Slowly!

[By Staff Reporters]Hospital Access Management

NewYork-Presbyterian Hospital recently introduced a new personal electronic health record [eHR] enabling patients to access medical information wherever and whenever they need it. Called myNYP.org, the system uses Microsoft’s HealthVault and Amalga technologies to offer patients the ability to select and store personal medical information generated during visits to NewYork-Presbyterian.

About NewYork-Presbyterian

NewYork-Presbyterian Hospital is one of the most comprehensive university hospitals in the world, with leading specialists in every field of medicine. The hospital is composed of two renowned medical centers, NewYork-Presbyterian Hospital/Columbia University Medical Center and NewYork-Presbyterian Hospital/Weill Cornell Medical Center, It is affiliated with two Ivy League medical institutions, Columbia University College of Physicians and Surgeons and Weill Cornell Medical College.

Assessment

MyNYP.org uses a “pull model” in which patients proactively opt to copy their medical data into their own personal health record and access that information using a secure username and password with any Web-enabled device. And yes, online bill pay features are available.

Conclusion

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My Favorite Health 2.0 Experience from McDonalds

Meet the Schwieterman’s

By Dr. David Edward Marcinko; MBA, CMP™biz-book

Back in 2005, we published the second edition of our popular textbook: the Business of Medical Practice. And, we are now working on the third edition. At the time however, I was fortunate to have a colleague from the Microsoft Corporation pen our Foreword, now reprinted below for your review.

Link: http://www.springerpub.com/prod.aspx?prod_id=23759

 

What a Family Tradition!

My favorite story came from Dr. Thomas Schwieterman, a fourth-generation physician working in the same medical office his great grandfather established in 1896 in the town of Mariastein, Ohio. From those same historic environs, Schwieterman has used Microsoft Access to create his own physician assistant application.

The Schwieterman Family Physicians practice kept him so busy that he was wondering how he could keep up with his patient caseload. Schwieterman wanted a faster way to handle prescriptions, provide medical information, and record data for his patient records. He walked into a McDonald’s restaurant one day and had an idea.

The Epiphany

“I ordered a cheeseburger and fries and watched the person at the counter touch the screen of the cash register a few times, and realized the order was getting transferred back to the food preparation area, and that by the time I paid, my order was ready,” he said. “I thought to myself: ‘That’s what I need!’” He searched for commercially available solutions, but when he couldn’t find an exact match for his needs, and when he found prices steep for a small private practice, he decided to create his own – using Access. He also called upon a friend with a Master’s Degree in electrical engineering to help on the coding. His creation boosted his income by 20 percent – “Which was important because we pay more than $60,000 a year for malpractice insurance even though our clinic has never been sued since it was founded 107 years ago.”

Assessment

What my friends at Microsoft especially like about this story is that when Dr. Schwieterman’s colleagues tried his program, liked it, and suggested he try to sell it, he put together a PowerPoint presentation – and landed a partnership agreement with a major healthcare supply and services corporation to market his ChartScribe solution.

Conclusion

So, the pressures facing physicians are great, but so are their resources. Information technology is one resource, this book is another, but the greatest of all is the innate curiosity and drive to discover and create that seems to be so much a part of those who are drawn to this noble profession.

Ahmad Hashem; MD, PhD

Global Healthcare Productivity Manager

Microsoft’s Healthcare Industry Solutions Group

Microsoft Corporation

Redmond, Washington 

Conclusion

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MSFT Amalga Video for Hospitals and Health Systems

It Was One Year Ago Today … Updated for 2009

By Staff Reportersstk128477rke

Release of a new unified intelligence system allows enterprise health providers to unlock the power of all data from their existing IT systems.

REDMOND, Wash. — April 9, 2008

Microsoft Corp. today announced the availability of Microsoft Amalga, the new unified intelligence system that allows hospital enterprises to unlock the power of all their data sitting in isolated clinical, financial and administrative solutions.

What it is – How it works

Amalga is part of the Microsoft Amalga Family of Health Enterprise Systems, a portfolio of enterprise-class health solutions that provides rich integration, giving clinicians and executive’s quick access to valuable, up-to-the-minute information across their health enterprise. Microsoft also announced the availability of the Amalga family of health enterprise products across Europe at conhIT 2008, a healthcare IT conference being held in Berlin this week (http://www.microsoft.com/emea/presscentre).

Health Vault

The patient compliment to Amalga is MSFT’s Health Vault initiative which helps consumers collect, store, and share critical patient health information, for free.

www.HealthVault.com

Assessment 2009

Video interview, by Matthew Holt, originally appeared on The Health Care Blog [THCB] on April 16th, 2009.

Link: http://www.thehealthcareblog.com/the_health_care_blog/2009/04/interview-microsoft-health-solutions-.html#comments

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