The Hardly Efficient Market

Wednesday, March 23, 2005 | 06:35 AM

I got my first iPod (a Press loaner from Apple) the first week they came out. It was a transcendant experience, and I pounded the table to nearly everyone I knew that this was a huge winner. It made Apple stock, trading then at a pre-split price of $18, with $13 in cash, absurdly cheap. Yet AAPL traded essentially flat from that late 2001 intro until its breakout in 2004. In late '02/early '03, the stock was $15.

For those who believe in the efficient market thesis -- an increasingly discredited theory that states markets (nearly) instantaneously reflect all available data -- kindly explain this chart to us:

click for larger chart
Ipod_apple_chart

graphic courtesy of the NYT

I told practically everyone I knew. From my mom to my co-workers to various fund managers, I went over the Apple iPod story til I was blue in the face (I eventauly came to be bored to tears with it).

The response? I heard every excuse as to why Apple was now irrelevant, the stock was "dead money," why the company couldn't make money, and why Dell was going to put them out of business. Then came the ubiquitous statement that it was impossible to compete with Microsoft. Some of Wall Street's dead fish analysts even suggested that Apple put out a Windows box based on an Intel CPU. (Can you imagine?)

My favorite comment came from someone who told me that since the market had valued Apple at a low price, it sees the reason that I don't (What are you, smarter than the entire market?). Apple's stock price, according to this perspective, was a fait accompli. There's an old Econ joke on the subject:

Two economists are walking down the street. One sees a $20 dollar bill lying on the sidewalk, and says so.

"Obviously not," says the other. "If there were, someone would have picked it up!" 

That's a perfect example of bad theory costing you money.

As we stated previously in The kinda-eventually-sorta-mostly-almost Efficient Market Theory, markets do usually get there -- not always, but most of the time, and not right away, but eventually.

Incidentally, the Efficient Market theory is the prime motivator behind indexing, which has been a losing propostion over the past few years (but I think thats more a function of market cap weighting than inefficient markets).

Expect to hear about this theory's decline in the coming years . . .



Source:
To Cut Online Chatter, Apple Goes to Court
By JOHN MARKOFF
NYT, March 21, 2005
http://www.nytimes.com/2005/03/21/technology/21apple.html

Wednesday, March 23, 2005 | 06:35 AM | Permalink | Comments (6) | TrackBack (3)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

bn-image

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8345852bd69e2

Listed below are links to weblogs that reference The Hardly Efficient Market:

» Prediction Market Common Sense from Mapping Strategy
As I commented last fall, the accuracy of Efficient Market Theory (or a lack thereof) has obvious bearing on how much effort it's worth investing in prediction markets, where they can be applied, how they should be structured and overseen, who ought to... [Read More]

Tracked on Mar 24, 2005 11:08:48 AM

» Prediction Market Common Sense from Mapping Strategy
As I commented last fall, the accuracy of Efficient Market Theory (or lack thereof) bears on how much effort it's worth investing in prediction markets, where they can be applied, how they should be structured and overseen, who ought to participate, an... [Read More]

Tracked on Mar 24, 2005 11:20:12 AM

» Non-Market Cap Weighted Indexes: The Next Big Thing from Investing Intelligently
I predict that within the next 10 years we will see a wave of new index ETFs and index/passive mutual funds. Almost all indexes currently available (and the ETFs and mutual funds that track them) are market-cap weighted. The technique that is usually u... [Read More]

Tracked on Feb 9, 2006 4:00:26 PM

Comments

Fred Wilson brings up something called "we company/they company" with respect to Apple (According to Fred, Apple is turning from "we" to "they"): http://avc.blogs.com/a_vc/2005/03/apple_becomes_a.html. But based on recent actions I feel Apple is actually beginning to bet against iPod sales. For similarity consider Microsoft/record studios/telcos/cable monopoly tactics: lock a customer in and squeeze every last penny before dying an ugly death (hopefully). The new "iPod tax" http://www.cnet.com/4520-6033_1-5817813-1.html?tag=nl.e501 and streaming restrictions http://www.boingboing.net/2005/03/16/apple_steals_itunes_.html seems to suggest that Apple is interested in drawing every dollar into its kitty early (instead of confidentally allowing third-party iPod accessories and wide-range legal music sharing) since the long term prospects of iPod/iTMS domination isn't clear? Or maybe I am just reading too much into it.

Posted by: Rajesh | Mar 23, 2005 10:01:58 AM

The comments to this entry are closed.



Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      

Archives

Complete Archives List

Blogroll

Blogroll

Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:


Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites

FeedBurner


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo

Disclaimer

Disclaimer

Odds & Ends

Site by Moxie Design Studios™

FeedBurner