Sunday Finds + 3 Thoughts From Last Week
Apple + Duolingo
3 Thoughts From Last Week:
Apparently, people still don’t understand Apple’s moat. Seeing bad analysis on Apple has me frustrated, mainly because I thought all this stuff was common knowledge. But I guess that’s why Apple is up almost 500% in the last five years and why I’ve never owned the stock. There are two reasons people buy iPhones, watches, and other Apple products: faux-luxury/quality and ecosystem lock-in. Apple's products are usually not best in class technologically (at best they are on par with the other device makers), and yet in rich nations, the majority of wealthy consumers prefer to spend 50% more for Apple products. Why? Because Apple has convinced people the products signal luxury and wealth to others. It would take too long to go through every method in this newsletter, but it has been a masterclass in brand building over the past two decades. My favorite though is the commercials with catchy music, splashy colors, and attractive actors holding iPhones that have nothing to do with the actual function of the product. Then, the company dug a moat around its products with a punitive lock-in strategy, most specifically with iMessage. iMessage is Apple’s text messaging service and is used by virtually every Apple user now. It is like most messaging services, however, unlike others, it creates artificial barriers and restrictions when messaging with non-Apple users (i.e. Android users). The most important of these restrictions are group messages and the color of someone’s texts (Apple users are blue, Android users are green). You might think this is dumb (it is), but it doesn’t change its importance. If you are under 40 years old in the United States, you have to buy an iPhone if you want to be included in all the digital social groups your friends are in. For the majority of people, that is not a sacrifice they are willing to make. It also feeds back to the brand building, giving people a feeling of superiority when on an Apple device. Nobody could give a damn about Apple’s new custom computer chips. As long as the messages are blue and Android’s are not, rich and young people will be using iPhones.
Morality as a retail/small-time investor. You can have morality as an investor, only buying shares in companies you believe make the world a better place. It does nothing though. Well, I should be clear, if you are an individual investor that will never be able to combat an activist campaign against a company, it does nothing. It is like wearing a mask outside to prevent getting COVID-19 or putting a tinfoil hat on to stop 5G signals from entering your brain. The decision may make you feel good, but it hasn’t changed anything about the situation. The best example I can give here is with tobacco companies. Personally, I have no objection to investing in them, because the fact I am a shareholder has no impact on the business. Deciding not to buy shares in Altria Group does not stop anyone from buying Marlboros. In fact, I would argue that when everyone agrees you can’t own a business for moral reasons, it actually has the reverse effect people intend. If the business is high quality (like tobacco), a depressed stock price makes long-term shareholders insanely wealthy, allowing them to profit even more on the sales of these harmful products/services than they otherwise would have. I think it is admirable to try and act morally when making your own consumer choices like avoiding cigarettes, lowering your negative environmental impact, eating healthy, and all that good stuff. But bringing that mindset to the investing world will do nothing but harm your returns.
Deflation is coming. I may lose some subscribers with this one, but I want to caveat by saying this is just my current opinion and there’s nothing stopping me from changing my mind three months from now (that should go for you too). Also, I never worry about macroeconomics when making investments, it is just fun to talk about. With that being said, I am firmly in the camp that the current inflation fears are overblown. Friend of the program Phillip Martinelli summed it up perfectly with a tweet the other week: “When you have rates at 0% and give away $3T in 18 months with a battered Supply Chain, and you only get 7% inflation . . . You don’t have an inflation problem.” When the pandemic started, companies started decreasing supply chain capacity (anticipating a slowdown) and had to start and stop operations with case spikes and breakouts. Then, the U.S. government gave away trillions of dollars directly to households. What did everyone do with that cash? Buy stuff. 2021 retail sales were up 18% year-over-year, the highest growth in decades. It is a simple supply (our ability to get goods to people) and demand mismatch that is creating inflationary pressure right now. With consumer balance sheets normalizing and government support systems essentially back to normal, I believe inflation trends will reverse and that we possibly see a bull-whip towards deflation over the next few years. One thing that could prevent this is wage growth, which has spiked, but that looks to be trending back to normal as well. It should also be noted that over the last few decades overall inflation has stayed low even with inflation in housing, healthcare, and education costs. Inflation in those categories is artificially created by choices we have made as a society. What happens if we get our senses back and start to act rationally in one or more of these sectors? That would be a major deflationary force as well.
See you next week,
Brett
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