Concerns with Apple Launching a Car
Last week we did a post revolving around Apple launching a car. Here are some major concerns I have with this move. To begin Apple has been successful in a business that has huge profit margins. Over the last 5 years the company’s profit margin has averaged 21.5%, this compares to GM at 5.74% and of course Tesla has just seen its first profitable year, but the profit margin last quarter for the company was just 2.48%. Next, If Apple decides to manufacture its own car the capital expenditures for factories and equipment are huge and the process is extremely complex. Another major issue is competition. There is not much competition in the smartphone market as there are just a few major players. In the auto market the space seems to be getting crowded with legacy companies like GM investing billions of dollars into EVs and AVs and newer players such as Tesla and companies from China like Nio. I do believe if Apple is serious about building a car, they could lose focus on their key business that has made them successful for years. It reminds me of GE. The company was successful for years, but to grow they kept getting into new industries and eventually lost control of the company needing to shrink and spinoff unsuccessful businesses. Even with the size of Apple, the company cannot do everything, and I believe it should focus on its core business and segments that aid that business.
Margin Debt
I have talked about the excessive valuations as a concern I have for this market, but in reading the Wall Street Journal yesterday morning another major issue came about. According to the Financial Industry Regulatory Authority, “Investors borrowed a record $722.1 billion against their investment portfolios through November.” This topped the previous record from May 2018 at $668.9 billion. The WSJ added, “margin debt records tend to precede bouts of volatility, as seen in 2000 and 2008.” The problem I see here is people are borrowing money to likely add to their favorite expensive names like Amazon, Apple, and Tesla. When these begin to fall investors could be faced with margin calls forcing them to sell the securities and adding to the selling pressure. Remember nothing goes up forever and playing with debt is a very dangerous game if used improperly!
Bitcoin
Bitcoin continues to rise exciting many bitcoin holders. Holders of Bitcoin may soon be thinking about taxes and selling, it is interesting to note how the IRS looks at Bitcoin. On the positive side Bitcoin will be taxed as a long-term capital gain if held for longer than 12 months, and as ordinary income if held less than 12 months. What is interesting is that the IRS taxes currencies as ordinary income, but Bitcoin is taxed as an asset. That is my dilemma, I thought this was a currency, but as an asset, what or where are the assets with Bitcoin? Can’t have it both ways, the craziness continues.
“To curb Ma’s empire, China weighs taking a bigger stake.”
In case you forgot that China is a communist country you need to read the headlines of the Wall Street Journal today. It reads “to curb Ma’s empire, China Weighs taking a bigger stake.” Jack Ma Is now the richest man in China and the Chinese government doesn’t like it. They were looking at ways to take away some of his business without appearing to be a communist regime. Could you imagine if that happened here in the US? However we have seen our government move closer to that with being able to shut down businesses and other such lock down orders. We have to be careful about giving up our freedom because someday that could happen here in the US. I know it sounds crazy and impossible, but had I told you one year ago that the government is going to shut down businesses and quarantine everyone you would’ve thought I was crazy.
Taxing Remote Workers
As remote work has climbed states are now battling for the right to tax those workers. A major state battling this currently is New York as it fights over residents from New Jersey and Connecticut. According to the Wall Street Journal, “In 2018, around 434,000 New Jersey residents paid $3.7 billion in New York income taxes, according to the New York State Department of Taxation and Finance. Almost 87,000 Connecticut residents paid New York an additional $1.3 billion in 2018; those two states’ residents account for about 10% of all the income tax New York collected that year.” But now as New Jersey’s Governor points out, the New Jersey residents are not commuting to New York and relying on the public services and the transit system. I’d have to side with the New Jersey Governor here. Somebody living in New Jersey and now working at home from New Jersey, why should they have to pay state income taxes to New York?
Concerns with Apple and China
One of my big concerns with Apple is China. I do worry about the company losing control in that country and also losing market share to China based companies like Huawei. The lack of control is becoming apparent with Apple’s app store. According to Sensor Tower, a company that tracks app business around the world, the China Apple App store had 272,000 games last year. In 2020, the company has found more than 94,000 removals. Even the Tripadvisor app was demanded to be removed. This came as the Cyberspace Administration of China said it was illegal without providing reasons why. I think people forget China makes the rules in China and they can interpret them however they please.
Growth in Retail Investors
2020 has definitely been an interesting year for stocks. One reason I believe it has been so crazy is the growth in retail investors. According to Citadel Securities, individual traders accounted for 10% of total trading volume in 2019 and in 2020 that number doubled to 20% of the volume. On peak days, that number was even higher at 25%. This reminds me an awful lot of the tech boom and I worry many individual traders will get burned as they did back during the craziness of the dot com bubble.
Year-end Investment Advice
Tonight is the last night of 2020 and I will be glad and I’m sure you as well to see this difficult year pass. But let me give you some year end investment advice. In 2020 no we did not invest in Tesla, Zoom, Amazon and nor did we or will we ever buy Bitcoin. As an investor it is a marathon race that lasts 5,10,20,30, 40 maybe 50 years. Actually, one will be investing for their entire lifetime. I am much more concerned with how we will do in the long term and that is why we stick to the fundamentals of investing that have proven themselves over the course of time. And while the sprinter may be far ahead of the marathon runner in the beginning, the sprinter does not have the stamina to run over 20 miles. Just like the old tale we were taught when we were younger about the tortoise and the hare, we all know that the tortoise won the long race and I believe the fundamentals will carry investors over the long term. Here at Wilsey Asset Management we wish you all a successful and prosperous 2021 as we say goodbye to 2020.
This newsletter is for informational purposes only and should not be used as investment advice. If you would like to discuss more in detail your investment needs or have other investment questions, feel free to call me at 858-546-4306 or visit our website at Smartinvesting2000.com.