How to pick a stock

Among the shares that I hold in my portfolio, Apple (AAPL) is currently among my largest positions. I was lucky buying it when the price was at 148 EUR per share on the XETRA exchange. Today the price is pending at around 200 EUR. An increase of over 30%.

The case for buying Apple was a pretty easy one. I understand what the company is doing. I believe that the company offers tremendous value with its quality products, and due to its image of a luxury brand, it’s getting away with charging its customers premium prices. It is also steadily expanding its products, services and deepening its eco-system, binding its customers to it. A smart approach and one that is unlikely to change any soon.

From a financial point of view, Apple has not only uniquely high-profit margins within the industry. It is also valued at a very moderate level in comparison with its peers. Apple has a tremendous amount of cash and invests constantly in research and development to stay ahead of its peers.

To the tech-savvy readers here, let me explain that staying ahead doesn’t mean to have the technically most advanced system or technology. Staying ahead means to have a great product, offering a technology that is up-to-date and understood by its customers, combined with an appealing design and seamless user-interface. This is called a customer-focused approach, and nobody in the industry does it better than Apple.

Understanding “The Moat”

This is the reason why there is no real competition out there. People might argue about whether iOS or Android is a better system. People might argue whether the hardware used by Apple is really ground-breaking or not. But nobody can argue the fact that Apple is the only real luxury brand in the technology market, with a dedicated and customer-centric focus.

The resulting difference to its competitors is stunning. While Apple has actually only a very small share of the global smartphone market, it collects 90% of the global mobile phone profits. Also, its laptops and workstations profit significantly higher than any Samsung, Huawei or Dell out there. Why would people pay so much more for these products than for others?

To make things more interesting, Apples focus on its software is now coming into the spotlight stronger than ever, which promise even higher profit margins.

A huge part of Apple’s success came from its smooth and seamless iOS system. Most iPhones usually had lower tech-specs compared to most other phones out there, but the iOS system was perfectly designed to the hardware. It allowed it to function more intuitive, more smooth and much more user-friendly.

The concept is actually copied from video game consoles. There was always this on-going debate, whether one should buy a power computer for gaming, or just a Playstation. The Playstation had usually a solid but not ground-breaking technology and always seemed to underperform in any pure benchmark comparison. And yet, more than often a Playstation could outperform any PC in gameplay and remain relevant in the market for significantly longer. The user-friendly approach and seamless hardware & software integration were key to success. Warren Buffett likes to call this kind of differentiating attribute a “moat”.

The Moat ensures long-term profits

So again, whatever your personal feeling on Apples vs. the rest is, the fact is that due to its solid moat, Apple can make more money than its competitors. Not a little more, but significantly more, for all the reasons above. It protects the company effectively in good and bad times, and it ensures the company remains relevant for a long time to go.

Long-term profits are the only thing that matter for stock-price appreciation, for dividend-growth and for the company to stay at the top. This is also why Warren Buffett is currently one of the largest shareholders of Apple. This is why I have bought shares of Apple. And looking for this kind of attributes in a company is a proven strategy on how to pick a stock.

Disclosure: I own shares of Apple.

1 thought on “How to pick a stock

  1. Pingback: Why investing in Pharma makes sense – Stop The Rat Race

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