Notes, Views, and the Occasional Provocation July / August 2011 

At the Field Museum in Chicago this summer, my family learned how small prehistoric mammals crawled into ancient seas eventually to become the gargantuan whales that swim the oceans today.

The story of Steve Jobs and Apple is not so different. The story of Borders Books, however, is one of failure to adapt and extinction. The good news for long-term investors is that they don't have to choose between either extreme in building prudent portfolios.

All the best,

Milo Benningfield

A Tale of Two Companies – Apple vs. Borders Books
Back in the 1990's, no one could have predicted where Apple and Borders Books would arrive this summer – and prudent investors did not try. more

BFA Media Quotes
Recent media quotes. more

A Tale of Two Companies – Apple vs. Borders Books
Among the grim news this week about the U.S. debt downgrade and falling markets, there was a remarkable event: Apple, Inc. passed Exxon Mobil Corp. to become the world's largest company. At market close today, Apple had a market value of $337 billion compared to Exxon's almost $331 billion.

Looking back, it seems inevitable that Apple would grow into a wildly successful behemoth with all its iMacs, iPods, iPhones, not to mention iTunes, Apple T.V. and other products. It wasn't so clear a little over a decade ago.

In the 1980's, Apple had ousted co-founder Steve Jobs and then floundered while Mr. Jobs wandered the tech wilderness for twelve years. When he finally re-joined Apple in the late 1990's, most analysts had given the company up for dead:

  • "Apple may have few options other than to shrink the company or to eventually sell out to a deep-pocketed partner." E.S Browning and Jim Carlton, "Apple Still Hobbled Despite Write-Down," Wall Street Journal, March 29, 1996.
  • "Our conclusion is that Apple has started down a path that will lead to its demise as a serious player in the PC market. ... Further, we do not believe Apple will survive its next downturn, which will presage the company spiraling into insignificance as it loses any advantage of scale." Excerpt from Dataquest company report. "Dataquest Sounds Death Knell for Apple," Reuters, September 23, 1997.

In 1997 Apple's stock was trading at $4 a share compared to almost $364 a share today. At a tech symposium, when Dell Computer CEO Michael Dell was asked what he would do to fix Apple, he famously told a group of executives, "What would I do? I'd shut it down and give the money back to the shareholders."

Around the same time, investors were excited by the dynamic retail innovator Borders Books. Borders started the big-box concept store combining books, music, and cafés all under one roof. By the late 1990's, Borders' strategy was so successful that it was being demonized for suffocating independent booksellers around the world.

Flash forward to this summer: as Apple ascended the market-capitalization throne, Borders came to an ignominious end, a victim of the times in the same way that buggy manufacturers lost to automobiles decades ago. Online book purchasing, facilitated by Amazon and, yes, Apple, had made large brick-and-mortar bookstores obsolete. Unable even to find a buyer for its business, Borders decided last month to liquidate its assets.

Back at the dawn of the Internet Age, Borders' specific path to extinction was as unpredictable as Apple's re-birth. If investors had been forced at the time to choose between Borders and Apple for their long-term financial health, it would have been a perilous bet.

Fortunately, prudent long-term investing is not a horse race on which you must bet the farm on an all-or-nothing proposition. Investors have more types of investment vehicles, more asset classes, and cheaper access to managers than ever before. More than ever, they have the ability to build a globally diversified portfolio designed to withstand and benefit from a variety of economic circumstances, not just one or two.

We're fortunate today that Steve Jobs did not take Michael Dell's advice, but instead embarked on what became a classic come-from-behind tale of perseverance and success. Mr. Dell hasn't done so badly himself over the years. But with Dell Computer worth less than one-tenth of Apple today, perhaps Mr. Dell should consider contacting Mr. Jobs for a little advice.

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BFA Media Quotes
The New York Times, July 26, 2011
Milo was quoted in an article by Tara Siegel Bernard, "How A Debt Downgrade May Affect Consumers." The article discussed potential market responses to the possible (and eventual) U.S. debt downgrade by the ratings agency Standard & Poor's. Milo noted concerns about the long-term psychology of a downgrade, but that the U.S. was still attractive to investors compared to other options:

"Sometimes I worry that a U.S. debt downgrade could have long-term negative psychological consequences as Americans realize the greatest power on earth is, alas, a mere mortal too," said Milo Benningfield, a certified financial planner in San Francisco. But "we're still looking pretty good relative to most everyone else in the world."

Read the article.

Thank you for reading. Please look for our next newsletter in September.

Best regards,

Milo Benningfield

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