Man’s Fatal Conceit

December 31st, 2011 by kevindawson

To paraphrase Hayek:

“The curious task of Christian humility is to demonstrate to people how little they really know about what the imagine they can design.”

Check out what Mark Skousen had to say about how a society really survives:

Jobs’s Job
by Mark Skousen, Investment U Contributing Editor
Friday, December 30, 2011

“There is no genius without a touch of madness.”

- Seneca

I just finished reading Walter Isaacson’s masterful bestseller, Steve Jobs, who he calls “the greatest business executive of our era,” equal in stature to Thomas Edison and Henry Ford. He was the classic Horatio Alger story, starting a computer business in his parents’ garage that became the world’s most valuable company – Apple (Nasdaq: AAPL).

He was responsible for major advances in six – count ‘em – industries: personal computers, animated movies, music, phones, tablet computing and digital publishing.

That’s not to say he was fun to be around. I’ve met over a dozen of Forbes Richest People in America, but as much as I admired Steve Jobs, I never wanted to meet him. He was notorious for his “bad boy” behavior and insulting strangers. His personal life was a mess. He frequently used LSD, seldom bathed, and was, according to his friends and associates, “an obsessive, narcissistic, frequently sociopathic nutcase” who tried to find happiness through Buddhist philosophy and strange eating habits. Not surprisingly, he died young. Sometimes it’s best not to get to know your favorite author, philosopher, or business leader.

But he has a lot to teach us when it comes to business and investing.

The Keynesian Myth

First, he proved that consumers don’t drive the economy: entrepreneurs, business innovators and visionaries do. Jobs made a point of demanding products that customers didn’t know they wanted – the Mac, the iPhone, the iPad. When asked about doing market research, he replied, “No, because consumers don’t know what they want until we’ve shown them.”

In an age when the media constantly promotes the Keynesian myth that “consumer spending is the largest single driver of the U.S. economy” (to quote The Wall Street Journal), Steve Jobs set the record straight.

“That’s not my approach,” he said. “Henry Ford once said, ‘If I’d asked customers what they wanted, they would have told me, “A faster horse!’” It’s entrepreneurship, productive investment, and creative innovation that create a higher standard of living. Consumption is the effect – not the cause – of prosperity. (This is known as Say’s law.)

Product First, Profits Follow

Second, the best companies and their leaders are driven ultimately by their desire to make great products or services, not profits. As Steve Jobs says, “The products, not the profits, are the motivation. Everything else is secondary.” He criticized his rival Bill Gates of Microsoft (Nasdaq: MSFT): “Winning business was more important [to him] than making great products.”

If you compare the stock performance of Apple with Microsoft, it’s a split decision. From 1986 until 2000, Microsoft rose 60-fold, from $1 to $60 a share, while Apple had a 20-fold increase from $2 to $40 a share, with far more volatility.

Since 2000, the race goes to Apple. While Microsoft is about breakeven for the past 12 years, Apple has increased another 10-fold, from $40 to $403 today.

The Future of Microsoft vs. Apple…

Now that Steve Jobs has died and Bill Gates has retired and devoted most of his time to charitable causes, are either stocks worth holding?

Apple is definitely the growth company, with revenue rising 39 percent in the past year, a P/E ratio of 14.5 and a P/E growth rate of 0.62.

Revenue and earnings are likely to rise substantially, given the popularity of iPhones, iPads, iTunes, etc. (This year, my wife got an iPad and I got an iPhone for Christmas.) It pays no dividend, although there’s pressure to return some of its $26 billion in cash to shareholders.

Microsoft is more a value play, selling for 9.4 times earnings, with a PEG ratio of 0.97 and revenue growing 7.3 percent a year. But interestingly profit margins are higher for Microsoft (33 percent versus Apple’s 27 percent). Since 2003, Microsoft has been paying out a growing dividend, now at $0.20 a share (3.1 percent).

Microsoft is definitely a safer bet for conservative investors. If you buy Apple, you are betting that Steve Jobs’ vision of superior and creative new products will continue.

One of Jobs’ adages applies here: “It’s better to be a pirate than to join the navy.” I’ve added this insight to my next edition of The Maxims of Wall Street – now available on Amazon.

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