Dow Jones Drops Nearly 700 Points; When Long-Term Apple Holders Should Sell

A big haircut in the quarterly revenue outlook for Apple sent U.S. shares tail-spinning in what has become a common refrain in stocks today for the past few months. The Dow Jones industrial average and the Nasdaq composite acted as co-leaders of the sell-off, each falling 2.8% to 3% and ending practically at the session's low.

The S&P 500, which dropped 6.2% (excluding dividends) in 2018, sank more than 2.4%. Intense buying in defensive areas of the market — think dairy and meat, property REITs, gold mining and telecom services — provided little solace for most investors. The Dow Jones utility average rose nearly 0.1% after falling almost 1.7% on Wednesday.

Dow Jones industrial component Verizon Communications (VZ), formerly on IBD Leaderboard, edged up 0.3%. The stock is trying to reclaim its rising 50-day moving average. Watch for a potential new base to form.

Curiously, small caps performed relatively better but still caved in price. The Russell 2000 fell 1.3%. The S&P SmallCap 600 fell 1.8%, snapping a five-day winning streak.

Volume ran higher vs. the same time Wednesday on both main exchanges, according to early data, signifying heavy institutional profit-taking.

Perhaps institutions are selling shares of multinational corporations much harder, given the clear evidence mounting in China of a growth slowdown. U.S. and China have called a 90-day truce on the trade war and have until March 1 to find a way to end the festering battle on import tariffs.

Apple Leads Dow Jones Lower

Apple gapped down at the open and remained near session lows, falling as much as 10%. The iPhone, iPad, Macbook and digital services giant cut its revenue guidance for the just-ended fiscal first quarter to $84 billion, down from $91 billion. This means Apple's top line is likely to fall nearly 5% on a year-over-year basis.

Such a drop in the top line would be the first since a 9% decline in the fiscal fourth quarter that ended in September 2016.

The Street, before the bombshell news from CEO Tim Cook shared late Wednesday, had been expecting fiscal Q1 profit to rise 20% to $4.65 a share. That comes after adjusted EPS gains of 18%, 24%, 16%, 30%, 40% and 41% in the prior six quarters. The consensus revenue growth forecast for the December-ended holiday quarter prior to the revised forecast came in at $91.49 billion, up 4%.

As the Stock Market Today column had noted frequently in the past, Apple began its impressive run after staging a clean breakout from a first-stage (or early stage) cup with handle on Jan. 6, 2017. The buy point at the time: 118.12. Since that breakout, the megacap tech rallied as much as 97% to its peak of 233.47 on Oct. 3 last year. Along the way, Apple built a series of additional bases, such as the flat base, and gentle pullbacks to the 10-week moving average. These actions presented new buy points along Apple's 21-month price run.

This breakout coincided with a turnaround in Apple's fundamentals. Exactly two years ago, Apple had reported its first quarter of year-over-year gains in both profits (up 2%) and sales (up 3%) in four quarters.

The complexion of Apple's chart action completely changed during the week ended Nov. 2. The stock cleaved through its 10-week moving average near 220.57, falling more than 4% for the week in volume that shot up 51% above its 10-week average. Apple hardly tried to rally back above this key support-and-resistance level; thus, a key IBD sell signal was born.

Apple Stock Strategy Now: Avoid A Full Round Trip Of Profits

Given the strong advance since that breakout, Apple shareholders who bought at the proper breakout point must draw a line in the sand. A solid gain should never be allowed to turn into a loss.

At the day's low of 142.08, Apple has now fallen 39% from a 233.47 peak.

Typical base patterns such as the cup with handle and double bottom generally show a decline of no more than 30% to 33%. But this often is the case in a bull market. With the bears in control, one can expect some corrections in top growth stocks to exceed that range. Breakouts from deep bases do work, but the probabilities are lower.

Seth Klarman: Personal life

Personal life[edit]

Klarman typically keeps a low profile, rarely speaking in public or granting interviews.^[22] He lives in Chestnut Hill, Massachusetts with his wife, Beth Schultz Klarman, whom he met on a Boston Harbor cruise in 1982; they have three children.^{[1][23][24][25]} His brother, Michael Klarman, is a professor at Harvard Law School

Seth Klarman: Investment philosophy

Investment philosophy[edit]

Klarman is a known value investor, and has stated that he has known he was one since junior year of college at age 25. During an interview at Harvard Business School, he stated: "It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic."^[15]

When asked what drives his fund's overall investment strategy and how value investing fits into the hedge fund market he replied:

Firstly, Value investing is intellectually elegant. You’re basically buying bargains. It also appeals because all the studies demonstrate that it works. People who chase growth, who chase high fliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. Third, it’s easy to talk in the abstract, but in real life you see situations that are just plain mispriced, where an ignored, neglected, or abhorred company may be just as attractive as others in the same industry. In time, the discount will be corrected, and you will have the wind at your back as a holder of the stock.^[15]

Klarman has been an avid supporter of the teachings of Benjamin Graham, and during the 2008 financial crisis criticized the short-term thinking of other fund managers, he believes that the "this-time-is-different" mindset will give a false sense of security to investors and they ought to look at the bigger picture. He stresses the utility in the economy's business cycles and their predestined and perpetual self-corrective tendency.^[15] Klarman is known to sit on 30% to 50% of his funds in cash as to avoid unfavorable market conditions and only buys stocks he thinks have a suitable mispricing.^[7]

He makes unusual investments, buying unpopular assets while they are undervalued, using complex derivatives, and buying put options. During his first years running Baupost he made it a point to only invest in companies that were not widely accepted by the Wall Street community; he stressed managing risk and using the margin of safety.^[7] He is a very conservative investor, and often holds a significant amount of cash in his investment portfolios, sometimes in excess of 50% of the total.^[18]Despite his unconventional strategies, he has consistently achieved high returns.^[19] Klarman looks for companies that are traded at a discount (so he can assume shares with a margin of safety). Klarman and his fund usually go "bargain hunting," when companies are distressed or face low growth or declining years. It was reported by The Boston Globe in 2015 that when energy stocks were declining, his firm "started looking for deals."^[20] According to Institutional Investor, "[Klarman] has succeeded by deftly exploiting under-valued markets whether they are in equities, junk bonds, bankruptcies, foreign bonds or real estate."

Seth Klarman: Investment career

Investment career[edit]

Further information on Seth Klarman's leadership of the Baupost Group: Baupost Group

After graduating from business school in 1982, he founded the Baupost Group with Harvard Professor William Poorvu and partners Howard Stevenson, Jordan Baruch and Isaac Auerbach. The name is an acronym based on the founders' names (the name was decided on before Klarman joined the project).^[7] Poorvu asked Klarman and his associates to manage some money he had raised from the selling of his share in a local television station and the fund was started with US$27 million in start up capital.^[7] His starting salary was $35,000 a year, considered low to alternative job offers,^[15] and he later recalled that the other founders "were taking a big risk on a relatively inexperienced person."^[7] Early on in his investment career, he used to badger Goldman Sachs salesmen with questions regarding their options and thoughts on the markets that they were afraid to pick up the phone if they saw that Baupost was calling.^[7]

In February 2008, Klarman was alerted that a London-based hedge fund, Peloton Partners, were forced to liquidate more than a billion dollars worth of their assets, he decided to open up his fund to new investors subsequently raising $4 billion in capital, mainly from large foundations and Ivy League endowments. He believed that there was serious market opportunity for value investors in the coming months and after the collapse of AIG and Lehman Brothers, he invested heavily in the equity markets, sometimes throwing $100 million into stocks a day. While the market was down due to the aftermath of the crisis he purchased many distressed securities and bonds. By early 2009, after J.P. Morgan Chase acquired Washington Mutual as a part of their deal with the U.S. Treasury, and SallieMae's bonds were returning double digit figures he would see serious returns. Overall, Klarman's bond position appreciated 25%, however, during the financial crisis, his fund returned -7% to -13%. Although many hedge funds faced negative returns and low performance during the crisis and its aftermath, Klarman saw increased equity positions and described it as a "fortuitous time" for the fund's capital gains.^[7] The same year he would go on to buy a minority share in the Boston Red Sox, via a stake in Ed Eskandarian.^[7]

In 2009, Klarman began buying distressed credits in the wake of the financial crisis of 2007–2008. He purchased the bonds of CIT Group, a financial holding company based in New York City at 65 cents on the dollar with a yield rate of 15%. After the company went into prepared bankruptcy, as Baupost began lending it money via a loan, Carl Icahn gave a loan of $6 billion to the CIT Group but backed out of the deal a week later. This caused the bonds to speed into prepared bankruptcy and gave the Baupost group securities valued at 80 cents to the dollar for their debt in CIT Group.^[7] Shortly after the CIT deal was finalized, Klarman amassed a stake in a new bio-tech company called FacetBiotech, at an average cost of $9 a share. At the time, FacetBiotech had $17 a share in net cash. Klarman noted that when stocks are spun off of their larger parent companies they become "cheap and ignored."^[7] When Biogen eventually tried a hostile takeover of the company bidding up the price to $14 a share, Abbott Laboratories asked for a $27 per share settlement for acquisition. Klarman's fund finished that year up +27%.^[7]

As of fiscal year 2016, the fund has US$31 billion in assets under management.^[

Seth Klarman: Early life and education

Early life and education[edit]

Seth Andrew Klarman was born on May 21, 1957 in New York City.^[6][2] When he was six he moved to the Mt. Washington area of Baltimore, Maryland near the Pimlico Race Track,^[7] and grew up in a traditional Jewish family.^[8][9][10] His father was a public health economist at Johns Hopkins University and his mother taught high school English.^[11][12] His parents divorced shortly after their moving to Baltimore.^[7]

When he was four years old he redecorated his room to match a retail store putting price tags on all of his belongings and gave an oral presentation to his fifth grade class about the logistics of buying a stock. As he grew older had a variety of small time business ventures including a paper route, a snow cone stand, a snow shoveling business, and sold stamp-coin collections on the weekends.^[6] When he was 10 years old he purchased his first stock, one share of Johnson & Johnson (the stock splitthree-for-one and over time tripled his initial investment). At age 12 he was regularly calling his broker to get stock quotes, his reasoning behind buying a share of Johnson & Johnson was the fact that he has used a lot of band-aids (a product of the company) during his earlier years.^[6]

Klarman attended Cornell University in Ithaca, New York, and was interested in majoring in mathematics but instead chose to pursue economics.^[7] He graduated magna cum laude in economics with a minor in history in 1979.^[13] In the summer of his junior year he interned at the Mutual Shares fund and was introduced to Max Heine and Michael Price. After graduating from college he went back to the company to work for 18 months before deciding to go to business school.^[7] He went on to attend Harvard Business School where he was a Baker Scholar and was classmates with Jeffrey Immelt, Steve Burke, Stephen Mandel, James Long and Jamie Dimon.

Philip Arthur Fisher

Philip Arthur Fisher (September 8, 1907 – March 11, 2004) was an American stock investor best known as the author of Common Stocks and Uncommon Profits, a guide to investing that has remained in print ever since it was first published in 1958.

Career[edit]

Philip Fisher's career began in 1928 when he dropped out of the newly created Stanford Graduate School of Business(later he would return to be one of only three people ever to teach the investment course)^[1] to work as a securities analyst with the Anglo-London Bank in San Francisco. He switched to a stock exchange firm for a short time before starting his own money management company, Fisher & Co., founded in 1931.^[2][3] He managed the company's affairs until his retirement in 1999 at the age of 91, and is reported to have made his clients extraordinary investment gains.^[4]

Although he began some fifty years before the name Silicon Valley became known, he specialized in innovative companies driven by research and development. He practiced long-term investing, and strove to buy great companies at reasonable prices. He was a very private person, giving few interviews, and was very selective about the clients he took on. He was not well-known to the public until he published his first book in 1958.^[5] At this point Fisher's popularity rose dramatically and propelled him to his now legendary status as a pioneer in the field of growth investing.^[6] Morningstar has called him "one of the great investors of all time".^[3] In Common Stocks and Uncommon Profits, Fisher said that the best time to sell a stock was "almost never". His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer, and held it until his death.^[7] Phillip is remembered for using and proliferating the "scuttlebutt" or "grape vine" tool, in which he searched fastidiously for information about a company.^[8] When you scuttlebutt, you make more informed decisions due a better basis for analysis and valuation.

In the 2018 Berkshire Hathaway annual shareholders meeting, Warren Buffett called Fisher's "Common stocks and uncommon profits" a "very very good book".^[9] He further described how using Fisher's "scuttlebutt" technique continues to be a good way to investing, which is still used by Ted and Todd at Berkshire Hathaway. John Train described Warren Buffett as 85% influenced by Benjamin Graham and 15% by Philip Fisher.^[10][11]

His son Kenneth L. Fisher also founded an investment firm.

Charlie Munger: Wealth and philanthropy

Wealth and philanthropy[edit]

As of February 2018, Munger has an estimated net worth of $1.74 billion according to Forbes Magazine.^[25]

Munger is a major benefactor of the University of Michigan. In 2007, Munger made a $3 million gift to the University of Michigan Law School for lighting improvements in Hutchins Hall and the William W. Cook Legal Research Building, including the noted Reading Room. In 2011, Munger made another gift to the Law School, contributing $20 million for renovations to the Lawyers Club housing complex, which will cover the majority of the $39 million cost. The renovated portion of the Lawyers Club will be renamed the Charles T. Munger Residences in the Lawyers Club in his honor.^{[26][27][28][29]}

On December 28, 2011, Munger donated 10 shares of Berkshire Hathaway Class A stock (currently valued at $288,200 per share, or $2.88 million total) to the University of Michigan.^[30]

On April 18, 2013, the University of Michigan announced the single largest gift in its history: a US$110 million gift from Munger to fund a new "state of the art" residence designed to foster a community of scholars, where graduate students from multiple disciplines can live and exchange ideas.^[31] The gift includes US$10 million for graduate student fellowships.^[32]

In addition to the University of Michigan, Munger and his late wife Nancy B. Munger have been major benefactors of Stanford University. Nancy Munger was an alumna of Stanford, and Wendy Munger, Charlie Munger's daughter from a previous marriage, was also an alumna (A.B. 1972). Both Nancy and Wendy Munger served as members of the Stanford board of trustees. In 2004, the Mungers donated 500 shares of Berkshire Hathaway Class A stock, then valued at $43.5 million, to Stanford to build a graduate student housing complex.^[33][34]

The Munger Graduate Residence opened in late 2009 and now houses 600 law and graduate students.^[35] The Mungers gave a major gift to Stanford's Green Libraryto fund the restoration of the Bing Wing as well as the construction of a rotunda on the library's second floor, and endowed the Munger Chair in Nancy and Charles Munger Professorship of Business at Stanford Law School.^[3][36]

In 1997, the Mungers donated $1.8 million to the Marlborough School in Los Angeles, of which Nancy Munger was an alumna.^[3] The couple also donated to the Polytechnic School in Pasadena and the Los Angeles YMCA.^[37]

Munger has been a trustee of the Harvard-Westlake School in Los Angeles for more than 40 years, and previously served as chair of the board of trustees. His five sons and stepsons as well as at least one grandson graduated from the prep school. In 2009, Munger donated eight shares of Berkshire Hathaway Class A stock, worth nearly $800,000, to Harvard-Westlake.^[3][38] In 2006, Munger donated 100 shares of Berkshire Hathaway Class A stock, then valued at $9.2 million, to the school toward a building campaign at Harvard-Westlake's middle school campus. The Mungers had previously made a gift to build the $13 million Munger Science Center at the high school campus, a two-story classroom and laboratory building which opened in 1995 and has been described as "a science teacher's dream".^[39][40] The design of the Science Center was substantially influenced by Munger.^[3]

In October 2014, Munger announced that he would donate $65 million to the Kavli Institute for Theoretical Physics at the University of California, Santa Barbara. This is the largest gift in the history of the school. The donation will go toward the construction of a residence building for visitors of the Kavli Institute in an effort to bring together physicists to exchange ideas as Munger stated,"to talk to one another, create new stuff, cross-fertilize ideas".^[41]

In March 2016, Munger announced a further $200 million gift to UC Santa Barbara for state of the art student housing, tripling the record gift he gave for the Kavli Institute for Theoretical Physics.^[42][43]

Munger has not signed The Giving Pledge that was started by his partner Warren Buffett and Co-Director, Bill Gates.

Charlie Munger: Early life and education

Early life and education[edit]

Munger was born in Omaha, Nebraska. As a teenager he worked at Buffett & Son, a grocery store owned by Warren Buffett's grandfather.^[2]

After enrolling in the University of Michigan, where he studied mathematics, he never returned to Omaha except to visit.^[3]In early 1943, a few days after his 19th birthday, he dropped out of college to serve in the U.S. Army Air Corps, where he became Second Lieutenant. He continued his studies in meteorology^[4] at Caltech in Pasadena, California, the town he was to make his home.^[3]

Through the GI Bill he took a number of advanced courses through several universities; without an undergraduate degree, he entered Harvard Law School and graduated magna cum laude with a J.D. in 1948. At Harvard he was a member of the Harvard Legal Aid Bureau.^[4][5]

In college and the Army he developed "an important skill": card playing. “What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don't get a big edge often. Opportunity comes, but it doesn't come often, so seize it when it does come.”

Charlie Munger

"Charles Munger" redirects here. For the American politician, mayor of Orlando, see Charles Henry Munger.

Charles Thomas Munger (born January 1, 1924) is an American investor, businessman and philanthropist. He is vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett has described Munger as his partner. Munger served as chairman of Wesco Financial Corporation from 1984 through 2011. He is also chairman of the Daily Journal Corporation, based in Los Angeles, California, and a director of Costco Wholesale Corporation

Benjamin Graham: Personal life

Personal life[edit]

According to The Snowball, after his son's death, Graham had an affair with the deceased's girlfriend Marie Louise "Malou" Amingues (who was several years older than his son^[17]) and used to travel to France frequently to visit her. He later separated from his wife, Estey, after she refused his offer to split their residence six months each year between New York and France. Amingues was content to live with Graham without marriage.^[18]

On September 21, 1976, Graham died in Aix-en-Provence, France, at the age of 82.

Benjamin Graham: Early life

Early life[edit]

Graham was born Benjamin Grossbaum in London, England,^[2] to Jewish parents.^[3][4] He moved to New York City with his family when he was one year old. After the death of his father and experiencing poverty, he became a good student, graduating as salutatorian of his class at Columbia. He declined an offer to teach English, mathematics, and philosophy, choosing instead to take a job on Wall Street, where he eventually started his Graham-Newman Partnership. Early on, Graham made a name for himself with "The Northern Pipeline Affair, " involving John D. Rockefeller.

Peter Lynch: Wealth and philanthropy

Wealth and philanthropy

According to a 2006 Boston Magazine article, Lynch has an overall net worth of $352 million USD.^[20]

Though he continues to work part-time as vice chairman of Fidelity Management & Research Co., the investment adviser arm of Fidelity Investments, spending most of his time mentoring young analysts, Peter Lynch focuses a great deal of time on philanthropy. He said he views philanthropy as a form of investment. He said he prefers to give money to support ideas that he thinks can spread, such as First Night, the New Year's Eve festival that began in Boston in 1976 and has inspired similar events in more than 200 other communities, and City Year, a community service program founded in Boston in 1988 that now operates in 14 locations.

The Lynches give money primarily in five ways: as individuals, through the Lynch Foundation, through a Fidelity Charitable Gift Fund, and through two charitable trusts.

The Lynches have made gifts as individuals, donating $10 million to Peter Lynch's alma mater, Boston College. BC, in turn, named the School of Education after the family.^[21][19]

The Lynch Foundation, valued at $125 million, gave away $8 million in 2013 and has made $80 million in grants since its inception.^[22] The Foundation supports education, religious organizations, cultural and historic organizations, and hospitals and medical research. Lynch was inducted into the Junior Achievement U.S. Business Hall of Fame in 1991.

Peter Lynch: Investment philosophy

Investment philosophy[edit]

Lynch has written (with co-author John Rothchild) three texts on investing, including One Up on Wall Street (ISBN 0671661035), Beating the Street (ISBN 0671759159), and Learn to Earn. The last-named book was written for beginning investors of all ages, mainly teenagers. In essence, One Up served as theory while Beating the Streetis application. One Up lays out Lynch’s investment technique including chapters devoted to stock classifications, the two-minute drill, famous numbers, and designing a portfolio. Most of Beating the Street consists of an extensive stock by stock discussion of Lynch’s 1992 Barron's Magazine selections, essentially providing an illustration of the concepts previously discussed. As such, both books represent study material for investors of any knowledge level or ability.

Lynch also wrote a series of investment articles for Worth magazine that expand on many of the concepts and companies mentioned in the books

Lynch coined some of the best known mantras of modern individual investing strategies.

His most famous investment principle is simply, "Invest in what you know," popularizing the economic concept of "local knowledge". Since most people tend to become expert in certain fields, applying this basic "invest in what you know" principle helps individual investors find good undervalued stocks.

Lynch uses this principle as a starting point for investors. He has also often said that the individual investor is more capable of making money from stocks than a fund manager, because they are able to spot good investments in their day-to-day lives before Wall Street. Throughout his two classic investment primers, he has outlined many of the investments he found when not in his office - he found them when he was out with his family, driving around or making a purchase at the mall. Lynch believes the individual investor is able to do this, too.^[14]

Lynch has also argued against market timing, stating: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves."^[15]

Lynch popularized the stock investment strategy “GARP” (Growth At A Reasonable Price)^[16], which is a hybrid stock-picking approach that balances Growth investingpotential with the discipline of Value investing. Many well-known funds now follow the GARP model, ranging from equity funds such as Fidelity Investments Fidelity Contrafund (FCNTX) and Lemma Senbet Fund, to index funds such as Russell Indexes iShares Russell 1000 Growth Index^[17].

He also coined the phrase "ten bagger" in a financial context. This refers to an investment which is worth ten times its original purchase price and comes from baseballwhere "bags" or "bases" that a runner reaches are the measure of the success of a play.^[18] A player who hits a home run with bases loaded (all three bases occupied by runners) will bring in ten "bags."