Last week, I wrote about the idea of a “never sell” portfolio.
As it happens, I had the chance to review an older relative’s investment portfolio over the weekend.
In doing so, I came across an example of a “never sell” stock and saw the impact it had on her portfolio. I was shocked to see that she had a whopping 27% of her retirement portfolio in this single stock.
Keeping such a big chunk of your portfolio in one stock breaks all the conventions of portfolio diversification.
And it’s certainly not the kind of concentration you see in the portfolio of your average 81-year-old retiree.
The stock in question? The world’s most valuable company, Apple Inc. (Nasdaq: AAPL).
As it turns out, my relative has held Apple since the company released the first iPhone in 2007.
Apple’s stock has risen from about $4 then to $145 today. That works out to an average annual rate of return of approximately 30% per year – just about equaling Warren Buffett’s performance in his prime.
Yet far simpler than the Oracle of Omaha’s approach was my relative’s investment strategy: “Never sell Apple stock.”
The Untold Secret of Apple’s Success
All this got me thinking about why Apple stock has been so successful.
Apple’s revenue surged 36% to $81.4 billion in the last quarter. Year over year, iPhone sales rose 50%, nearing $40 billion.
The company earned $21.7 billion, or $1.30 per share, nearly doubling profits earned during the same period last year.
The iPhone still generates nearly 50% of Apple’s revenues.
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It is a premium product, which is why Apple captures 92% of global smartphone profits with only a 20% market share.
But the more I thought about it, the more I realized that Apple’s most important “asset” isn’t reflected on its financial statements.
Yes, Apple’s “soft” assets, such as its brand, product design and ecosystem, lock in longtime Apple users like me. But the true secret to Apple’s success is that its premier product is an addiction.
Evolution of the Smartphone Addiction
When Apple launched the iPhone, Steve Jobs’ goal was to “put a dent in the universe.”
He succeeded.
Apple released the first iPhone on June 29, 2007. Since then, Apple has sold 1.3 billion iPhones (seven or so to me).
Today, 3.8 billion people – just under half the world’s population – own smartphones.
What accounts for the smartphone’s remarkable success? As it turns out, using one changes our brains.
The hippocampi of London cab drivers’ brains grow after they memorize “The Knowledge” – a detailed map of London streets.
Smartphones have a similar effect. They literally reshape our brains, and we become addicted to them.
In this way, smartphones are similar to another addictive substance: nicotine.
If you are a smoker, your craving for nicotine is wired into your brain.
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How does nicotine work? When you smoke a cigarette, nicotine is absorbed into your blood. It then stimulates your adrenal glands to release the hormone epinephrine (adrenaline). Epinephrine, in turn, increases your blood pressure, breathing and heart rate.
Much like cocaine and heroin, nicotine increases dopamine levels. Dopamine affects parts of the brain that control reward and pleasure.
So what does this have to do with the iPhone?
As it turns out, this dopamine “hit” is the same thing that compels you – and 1.8 billion others on the planet – to check your Facebook page every day.
That literally makes smartphones addictive.
In a recent study by Psychology Today, 94% of participants reported feeling troubled when they didn’t have their phone with them.
Another study found that half of participants would rather have a broken bone than a broken phone.
Are Smartphones the New Tobacco?
Comparing smartphone use to nicotine may strike you as absurd.
After all, smoking causes cancer, heart disease and respiratory illness, which can be fatal. About 8 million people will die from tobacco use this year.
IPhones don’t kill – at least not directly. (Although the Insurance Information Institute reports that 14% of fatal car crashes in the U.S. involve cellphones.)
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Still, there are unsettling parallels between the strategies of big tobacco companies and tech giants like Apple.
Tech companies work hard to keep their users addicted, and they have become remarkably good at it.
Forty-six percent of U.S. smartphone users spend between five and six hours on a smartphone every day.
Apple claims that they are just giving users what they want. (For a detailed examination of these tactics, watch The Social Dilemma, a Netflix documentary that explores the dangerous impact of social networking.)
The addictive properties of smartphones have been exacerbated by the shift of everyday infrastructure to smartphone apps.
The sheer number and variety of apps – for trading, banking, commuting, making event reservations and ticket purchases, acquiring COVID-19 vaccination certificates and more – have made it almost impossible to live without a smartphone.
Comparing the dangers of smartphones to those of tobacco may be overstating it. But there is little doubt that the devices are as addictive as nicotine.
And investing in a company whose product is addictive… Well, that makes a lot of sense, no matter what today’s financial statements tell you.
Getting back to my relative’s investment in Apple… I don’t believe Apple will continue to rise 30% per year forever. That said, the addictive properties of Apple’s products make it hard to let go of the stock.
If you own Apple, I recommend you consider it part of your “never sell” portfolio. Enjoy the stock’s relentless long-term rise – preferably outside with your iPhone turned off.
The profits alone are genuinely addictive.
Good investing,
Nicholas
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