Tuesday, May 9, 2017

Missing from the advice

Motley Fool recently provided "3 Tips for Investing in Apple Inc. Supplier Stocks." Essentialy, they are:

  • Look for companies with rare, differentiated technologies
  • Look for high barriers to entry
  • Look for technologies that clearly affect the user experience
Would they same advice hold for Apple investing in these suppliers? That is, should they vertically integrate by purchasing a supplier with these characteristics? After all, these are the characteristics that tend to make a firm profitable. I see two problems.

1. EMH: An invester does not want a profitable firm; he wants a more profitable firm. That is, the purchase price already reflects the present value of the expected future profits. In order for the purchase to be profitable, the present value of the expected future profits must be made to be more than the purchase price. Your average Joe investor usually will typically not know if this can happen nor can he make it happen.
2. Synergies: Apple could possibly make it happen. It could possibly do this if it sees that the current arrangement prevents some efficiencies and that vertical integration would solve them.

But do not purchase a company merely because it is profitable.

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