Monday, June 28, 2010

The Fundamental Truth of Investment

Apple's new iPhone has been the most successful product launch in the company's history. They sold 1.7 million of 'em in just three days, and they'd have sold many more if there'd been more supplies to sell. And just six days ago, Apple announced sales of three million iPads (a much more expensive and less established product) in 80 days

These are two absolutely sensational bits of news, blowing out all analyst predictions and translating into billions of dollars for the company's bottom line. And yet the company's stock price hasn't budged.

It's true that Apple's being investigated for anti-competitive practices, but we've known about that for a while. And it's true that Android's doing pretty well, but that, too, is relatively old news. And, yes, the new iPhone has a couple of minor flaws, but what newly designed (or redesigned) gizmo doesn't? So the question remains: how can a company hit two resounding home runs, each beyond all forecasts, yet not see its stock price increase?

Answer: the stock price already reflected investor confidence that resounding home runs would be hit. If the iPad and iPhone had sold merely well, the stock would have tanked. Exuberance is so high that fantastic results are mere status quo, unable to move the stock price. The only way the stock can move higher is for future sales to be so miraculous that they exceed even the most exuberant expectations.

It's a reminder of a fundamental truth that so many individual investors fail (at great peril) to fathom: that buying a company's stock is not a wager that the company will do well. It's a wager that other investors have undervalued the stock; that the company will exceed the expectations of a bunch of very close observers, including brilliant people who've chewed every number and investigated every competitor.

You don't bet on companies. You bet against other investors. And they're mostly smarter than you (I bought Apple at $114, because I thought it might be undervalued, but only because I thought I had real world perspective that smarter investors lacked).

Exception: the long tail of little pre-commercialized companies which nobody has time to investigate.
SIGA has created a very safe and effective cure for smallpox (and all its weaponized varieties) which is less than a year from FDA approval and even closer to a (much-delayed) nine-figure contract to stockpile the drug for homeland defense (to be followed by orders from India, EU, South Korea, and any other country fearing bioterrorism). They have an amazing pipeline of other miracle drugs under development, and a wee market cap of $320M, yet no one's ever heard of them, and their stock price remains in the sevens. That's undervalued, relative to the likely potential.

Don't even think of investing in a speculative bio-tech with funds you can't afford to lose. But I expect this will be my last mention (here's the
first, and here are all, in reverse chronological order) before you hear about SIGA on the news - though, obviously, I've been way too optimistic on the time frame previously, and I may be doing so again. On the other hand, none of the delays have affected SIGA's potential. On the contrary, it's brighter than ever (if anyone has invested in SIGA previously and is curious for an update, let me know via comments, and I'll post one. I'd rather not bore everyone with details if no one has a stake!).

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