Lately, I have seen a lot of discussion about tech stocks that makes me want to pull out my old Discrete Mathematics text book. I’m pretty sure if I pulled it out I could find a section on the isolation of individual events. It’d read something like this, “If you flip a coin 10 times, the probability that it comes up heads every time is very low (about .01%). However, if the coin has already come up heads 9 times, the probability that it comes up heads again is exactly 50%. Neither the positive “momentum” of a streak nor the improbability of 10 straight heads flips effects the expected outcome of the 10th flip.
This law of probability comes in to play when I think about valuing the stock of a disruptive company like Apple. Apple makes there money disrupting industries and then holding on to high margins while everyone else catches up. Then they either lower their prices (iPod) and hold on to slimmer margins or enjoy making a good margin on smaller and smaller market share (Mac, iPhone). Make no mistake though, Apple’s growth relies on them continuing to disrupt industry segments. Apple has been enormously successful at this. They have forever changed the personal music, phone and tablet industries in the last 10 years. The problem is, that success doesn’t guarantee that they’ll be able to disrupt whatever market they attack next.
Since their expected growth (and
20 16.7 P/E ratio) depend on continued disruptions, I think there is some risk in the stock. That’s why even though I think Apple is a great company and is brilliantly run, I don’t own any stock. Now that may not be true for everyone, I tend to be conservative in my stock investments since I have so much tied up in the pretty risky world of startups. I’m just saying that there are some dangers that don’t get talked about often enough.