Sachin’s Posterous

Agree with your analysis, but I also think that any price changes (insofar as it's possible to assign any cause to them at all) is likely speculation on other people's behavior--no doubt encouraged by the Cramers of the world.

Everyone knows that nothing really changed, but this is news that I think other people might react to (irrationally), so I'll buy in betting that others will later (rationally).

Also, I wonder if it should actually (intrinsically) have a negative effect, now that iPod software updates will likely be given away for free instead of collecting some small amount of money.

Unless, of course, that spurs iPod sales.

Investing in the stock market isn't about beating the system or the day traders at their own game. It is about keeping up with the system. If inflation goes up by 7% and you are keeping $ in a savings account at 4%, you're losing money.

So you have to invest in something keeping up with inflation. Houses gain value, art gains value, money gains value. So if you invest, even randomly, on average, you'll probably do as well as well that savings account. True, it is riskier than a savings account, but it also has a bigger upside.

Also different people are investing for different time periods (long vs. short) and have different tolerances for risk. Like apple stock fluctuates a lot in a given day. Day traders can buy and sell within the day and make money. If you're not watching it all the time, it doesn't mean you can't make money, you just won't make the most money. But that beats losing value because you do nothing, right?

I think Sachin wasn't arguing against investing in stocks as a whole (say, with a total market index)--but rather just arguing against investing in individual stocks or trying to capture value in small movements related to some piece of news.

Right, I think it is important to invest in general. But I don't agree with individual people purchasing individual stocks. Usually these people buy on passion, don't do enough research, and don't diversify.

oh yeah. ok. ;)

Do people still listen to what Cramer says? His track record shows that if you ignored him, you'd make more money! Sachin, investing in the index+dollar cost averaging is good, but rather than go for mutual funds go for ETFs (Exchange Traded Funds) - they're cheaper.

I would not put too much stock in anything Cramer says! ;)

The revenue recognition accounting rules are something widely bemoaned in tech, they got much tighter for tech in 1999 I think though it took a few years for the FASB rulings to get fully interpreted and implemented. If you mess up and overstate revenue relative to the FASB rules, ultimately your auditors will make you restate your earnings lower at which time your corporation loses all credibility with the investing community and your stock plummets.

If FASB makes improvements that would be great, many many CFOs I'm sure will applaud this. I am wondering what specifics they might change which Apple would benefit from so much?

There is a delay factor when new FASB stuff comes out; the whole auditing community has to absorb the new pronouncements and decide what they really mean. If you can't convince your independent auditors that your accounting is correct, then you are nowhere.

Lots of tech companies make much more money than they can report as revenue under current rules, but believe me they are thinking about this all the time because it is a crying shame for them as for Apple.

Cramer is one of modern day's best entertainers, and the price is right as long as you don't take his advice, in my opinion. Of course it's been alleged that Cramer drives stock price too, at least in the very short term.

cheers

I disagree with Cramer. Companies have been smoothing earnings for years. The classic example is Microsoft. When MS launched Office 97, they booked 20 cents of deferred revenue on every dollar of sales in 1998. Then, in 1998, they decrease the liability account and increase the revenue.

The finance and accounting teams do it because investors want to see nice smooth upward arching trend lines when they look at revenue growth. And if you only release a new product every few years, the reality of your revenue makes for a very spiky graph.

The way around that numbers game is to look at the Cash Flow Statement. While you can fudge the revenue for any given year, you can't fudge the cash without outright fraud.

I don't know if investors have it right or wrong, but I disagree with Cramer that he's the first one to get the scoop on tech companies using earnings management to smooth out their revenue from year to year. I think that information is already priced in.

Alan, are you saying that Apple will continue to defer revenue in order to smooth their revenue growth?

Both. Apple will continue smoothing earnings by deferring revenue (just like all other companies) As long as Apple financial managers can come up with a good argument to defer revenue (ie we have to offer tech support for free - there's a cost to that, we think some of the phones might get returned,etc.), then they will create a liability account and defer revenue from a really good revenue year (a product launch year) until a point in future when they need it (a bad revenue year) But I think that information is already priced in.

I agree with you about Cramer - he has the ability to move markets. George Soros wrote a lot about the reflexivity of markets. It's a fascinating concept.