Related topics: Microsoft, commodities, Apple, investing strategy, Bill Fleckenstein
Recently I have received an unusual number of emails from readers of my subscription site, Fleckensteincapital.com, on the seemingly unrelated subjects of silver and Microsoft.
With silver on a tear lately, some of these emails have bordered on giddy. Others, though, have taken me to task for not believing in the theory (aka myth) of silver market manipulation that has been floating around for years, and which I have debunked many times.
Similarly, every time Microsoft (MSFT, news) stock swoons, I get a batch of messages from readers telling me their thesis as to why it is weak. (Microsoft is the publisher of MSN Money.)
In thinking about those emails, I realized the topics were connected and that they illuminate a very important subject in investing: the power of psychology. This is the "force" that persuades people to hate what is cheap and love what is expensive. These two assets provide textbook illustrations of that phenomenon.
It's all in everyone else's head
Over the past few weeks, silver has become especially popular, and its market quite frothy, while Microsoft is somewhere between loathed and forgotten. As recently as 2004, silver changed hands for a little more than $4 per ounce, yet it's now well above $48 an ounce. Thus, in the last seven years, it has appreciated more than elevenfold, although at the start of that run it was regarded even more pitiably than Microsoft is today.
Bill Fleckenstein
People today can at least acknowledge Microsoft as a viable investment. Silver in 2004 was thought of as barely even an industrial metal, one whose price was destined to decline as photography went digital. So why would anyone ever want to own it?
Conversely, though off its 2000 high, a share of Microsoft changed hands for about $25, or 20 times earnings, in 2004. That's approximately the same price the stock sells for today. Since then, earnings have doubled, from around $1.26 per share to something north of $2.50 this year. Thus, the price-to-earnings ratio has been cut in half.
Microsoft stock trades as it does not because of some enormous flaw in its collective business strategies, but simply because it has become unpopular -- for a variety of reasons. The biggest of these is probably the rise in popularity of cloud computing concepts, followed by the market being mesmerized with anything related to Apple (AAPL, news).
People are enthralled with Apple's doodads even though life in the business world could easily go on without Apple, while it could not without Microsoft. But Microsoft is not alone. Other large-cap tech stocks trade similarly. I just focus on Microsoft because I think it is positioned so much better than Intel (INTC, news), Cisco Systems (CSCO, news) or other comparable companies.
Precious 'mentals'
We aren't limited to technology to demonstrate how psychology impacts the price of securities, though. In the mining arena, it was only two months ago that Newmont Mining (NEM, news) issued guidance for the year that was deemed not good enough. The stock was bludgeoned; it dropped about 10% in one day and wound up losing almost 20% in two weeks before that little swoon was over. Yet now it is right back to where it was. The perception then was, apparently, that Newmont had problems. But since then, its results have alleviated some of those concerns.
The Newmont example also shows that psychology can change rather quickly. Whether that change was momentary, I can't say. But the impossibility of handicapping the mental variable (in Jim Grant's wonderful book of the same name, he labeled it "Money of the Mind") is why contrarians do as well as they do. By being willing to take the side of apathy or scorn, they get a price on a security that is depressed because of human emotions. As a result, what is required to make money is not a change in the business, but rather a change in the perception of that business. And if you are lucky enough to get both, you can benefit from a double whammy, as the earnings and the earnings multiple both expand.
Still, the madness of crowds is what makes the investment business so difficult -- which is why it is called investing or speculating, not winning. Sometimes it is quite straightforward to ferret out what a company may do, but how that will be perceived is often anyone's guess. That is why conventional wisdom argues for diversification; one can't really know how the other wildebeests on the plain will react to a potential change in the wind.
In any case, I hope that discussion of two ideas that seem so disconnected -- silver and Microsoft -- helps folks navigate future fluctuations in ideas or asset prices they care about. As unsatisfying as it is to say, on a short-term basis, psychology matters a great deal more than underlying company fundamentals.
On the air
For readers who enjoy my interview series with Eric King of King World News, we covered a lot of ground in our latest exchange. Those who are interested can listen to it here.
At the time of publication, Bill Fleckenstein owned or controlled stock in the following companies: Newmont Mining and Microsoft.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
Apple's revenue was $24.7b with profit of $5.99b so the net profit was 24.3%. Microsoft's revenue was $16.4b with profit of $5.23b so their net profit margin was 31.9%. Apple made $700m more profit doing 50% more business. That's ridiculous. Why would Microsoft want to increase their revenue by 50% to make 13% more profit? Sorry, I thnk Microsoft needs to stick to software ane leave the hardware to everyone else including Dell, HTC, Nokia, Samsung and the likes. If Microsoft is successful with Nokia using WP7/WP8 and sells 50m smart phones in 2012 that would generate $1b in revenue and $300m in profit. Apple would still 50% larger in revenue and have larger profit than Microsoft. So what Microsoft would still be the largest and most profitable "software" company in the world but maybe their stock would reach $31 share. Apple's correctly priced due to popularity and future prospects, Microsoft's underpriced due to lacked of popularity and investor ignorance and silver's overpriced due to over popularity and investor ignorance.
