Subject: Re: BAC
Apple is massively over-valued. The dominant theme from the dominant poster. Really?

What a curious complaint.
First, I have never said that Apple is massivily overvalued.
Nor do I always say it is overvalued...I noted it was a great buy in March 2013 before Berkshire ever got on board.

I think we can all agree that it's certainly valued much more exuberantly at some times than at others.
It traded at under 12 times (smooth) trailing earnings around end 2018, and at over 40 times (smooth) trailing earnings around end 2021.
Using earnings as the value proxy with or without cyclical adjustment, expanding valuation multiples have accounted for over 14%/year of Apple's price return in the last decade.
Wide variation in valuation levels is a given, no matter what metric of value you choose.

It's a mathematical necessity that either (a) the peaks of price exuberance are ALL still below true fair value, or (b) sometimes the price gets ahead of the value: temporarily overpriced, in other words.

I merely assume option (b) when I'm estimating the conservative value of Berkshire's position in Apple. I allow for the possibility of temporary overvaluation.
Is that so crazy?

The only other approach, option (a), is to conclude that the market price of Apple is *always* an underestimate of fair value, no matter how high it ever gets.
I can't see any way to defend that approach as being superior.


The purpose of my valuation exercise is simply to estimate conservatively the true intrinsic value of a share of Berkshire, which necessarily involves assigning a value to Apple stock.
When estimating what my position is worth, I would rather be pleasantly surprised than unpleasantly surprised.
(I would never use a valuation based on this figure to suggest someone sell Apple stock, nor to short it)
The reason for leaning towards conservatism is that surprises do happen to even the most admired of firms. Some good, some less so.
Most of the time I use the market price of the stock positions.
When the market price of Apple (or Coke or whatever) seems to include a bit too much optimism, I cap my value estimate to a (rich) multiple of earnings, maybe 1/3 of the time in recent years.
Apple's earnings are relatively smooth and predictable, so it's not too hard to do a cyclical adjustment, and not too risky to use that figure as a proxy for the trajectory of true fair value.
For a while I used the value of cash-minus-debt, plus a multiple of adjusted earnings, but that's no longer really needed as the cash pile has become less material.
As I often mention, I hope that Apple stock is worth more than my more conservative value, I am merely unwilling to assume this is the case.


It is OK to be wrong, even really-really-really-really wrong, we all are from time to time.
But at some point do you ever learn to quit digging your hole or are you so popular from digging that hole that you simply can't stop?

I track the progress of the value of Apple based on the progress of its cyclically adjusted earning power rather than solely the progress of its market price (which is what Berkshire's book value tracks).
I think temporarily over-optimistic market prices are possible, so I make a rough guess at the magnitude when it seems like it might be happening.
Maybe my threshold is a little too strict, maybe it's a little too lax. Nobody's perfect.
But if allowing for the mere possibility of overvaluation represents being really-really-really-really wrong and digging a hole of craziness, I'll happily keep my shovel, thanks.

Jim
New motto: Dig on!