Diversification vs. Diworseification

Analyzing bad analysis... Apple Car vs. Beats... $10 billion diworseified away... Software and cars are different... A tale of two shoemakers... The right way to invest... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Analyzing bad analysis... Apple Car vs. Beats... $10 billion diworseified away... Software and cars are different... A tale of two shoemakers... The right way to invest... --------------------------------------------------------------- Apple should have listened to me nine years ago... In February 2015, Apple (AAPL) announced that it had several hundred employees working on designing an Apple-branded electric car in a project code-named Titan. Apple had reimagined music with the iPod and iTunes store. It reimagined phones with the iPhone. It reimagined mobile computing with the iPad. I'm not sure how anybody at the company ever thought the next logical step was to reimagine the automobile. I appeared on Money With Melissa Francis on Fox Business to talk about Apple's announcement. I naturally pointed out how the "Apple Car" made no sense and would likely cost the company a ton of money before it failed. I pointed out that Apple had a great, capital-efficient, high-margin business selling smartphones and iPads... and that making cars is a notoriously capital-intensive, highly competitive, low-margin business. Francis parroted the popular viewpoint that Apple wasn't innovative enough and needed to "do something." She said it should hire people from Tesla (TSLA), apparently oblivious to the fact that Tesla was poaching Apple execs back then. Other folks who should have known better chimed in as well. A Wall Street Journal analyst who had covered Apple for years at that time said Apple's revenues would rise 60% if it could capture just 10% of the car market. It's worth taking a moment to spell out what's wrong with that kind of analysis... If you ever hear anyone say, "If XYZ company can capture just [insert some small-sounding percentage] of the enormous market for [whatever product], it could be worth billions," they're really just telling you they don't know how business works and you can safely ignore them. The smart entrepreneurs will usually say something more like, "X is a small market, but our product is radically better than what's there and we believe we can capture a huge share quickly." That will perk up a smart venture capitalist's ears a lot faster than "diddlysquat percent of a giant, hyper-competitive market" like cars. Consider Apple's biggest acquisition: Beats, which sold high-end headphones and subscriptions for online music streaming. This $3 billion purchase in 2014 is a great example of a company that knew what it was doing. When record producer Jimmy Iovine and rapper Dr. Dre started Beats Electronics in 2006, only a very few professional musicians, record producers, and hardcore audiophiles spent $300 for a pair of headphones. The market was tiny... and as far as most regular folks like you and me were concerned, it was nonexistent. Beats released its first pair of $300 headphones in 2008. Everyone said it was crazy. Crazy. But by 2012, Beats had more than 60% of the market for headphones costing $100 or more. And the market grew 73% that year. Two years later, Apple acquired Beats for $3 billion. It was a perfect fit. Apple understands high-quality, expensive consumer gadgets like Beats headphones. Plus, music has been a key part of its business since it introduced the iPod and iTunes in 2001. Apple rebranded Beats' subscription streaming service as Apple Music in June 2015, and it had 10 million subscribers by January 2016. It has 88 million today and is expected to cross 100 million this year. It generated $8.3 billion in sales, more than 6% of Apple's 2022 revenue. Beats is the kind of business Apple was right to get into. It meshed perfectly with what everything Apple already knew how to do very well. By contrast, Project Titan was a $10 billion-plus foray into an industry where Apple should never have expected to succeed. No surprise that Apple said Tuesday that it's shutting down Project Titan... Fortunately, Apple is such a cash-gushing behemoth that $10 billion spent over the course of 10 years doesn't hurt that bad. Among the telling details in the announcement was the report that Apple will disburse nearly 2,000 former Titan employees, sending some over to its AI group. It felt as if they'd shut down a farm and sent the employees to go work in a law firm. The group included former NASA engineers and folks who had developed race cars for Porsche, but how does experience developing cars help with anything Apple could want to do? Maybe I'm making too much out of it, but it struck me as weird because software and cars are so different. If you were to start up a car company, would you immediately say, "First, I need to find people who are really good at writing software"? And yes, I'm fully aware that, as tech entrepreneur/venture capitalist Marc Andreessen once put it, "Software is eating the world," including the car industry. But that doesn't come anywhere close to meaning that writing code is similar to building a car. In the car business, the software guys work for the car guys, not the other way around. The end product is a car, a giant hunk of painted metal with wheels and a motor (electric or otherwise). The end product in AI is whatever the software does. And no matter how you look at it, people ultimately make the decisions that go into car building, not machines or software programs. Surely you get the point that physical stuff is not software, no matter how integral to the process of making physical stuff the software might be. (I can't help noticing that the widely touted use of AI to power self-driving cars is a flop so far.) Ultimately, Apple's decision to shut down Apple Car is good for shareholders. It'll waste no more money on this project. And at least with AI, Apple is in more familiar territory as a techy consumer-products company that also produces a lot of software. I bet it could even use AI to make Apple Music better. As the Wall Street Journal correctly pointed out on Wednesday, Apple's failure is confirmation of how hard it is to succeed in the car business and how unlikely Tesla's success has been. Making cars and consistently selling them at a profit is hard enough. Doing it without any history at car making or other heavy-machinery design, engineering, and manufacturing with an entirely new brand is exponentially harder. Thinking about Beats and Apple Car reminds me very much of what so many huge companies have done in the past... Eager for growth and apparently short on good ideas, Apple engaged in the time-honored practice of "diworseification." As far as I can tell, investing legend Peter Lynch invented the term diworseification in his must-read 1989 investment classic, One Up on Wall Street ([buy it right now]( and read it cover to cover if you haven't done so). Lynch used the term to describe companies that made acquisitions fitting two criteria: - Overpriced - Completely beyond the understanding of management You don't need to be the CEO of a big company or a billionaire investor to understand Lynch's point. If you've ever owned a large, expensive boat, you understand what Lynch was talking about better than most folks ever will. The pool we installed in our backyard has given me a bit of a diworseification hangover, too. Any time you say, "If I had it to do over again, I'd avoid spending all that money on..." you're in diworseification territory. Lynch gave plenty of examples from the corporate world in the decades before he wrote the book, including Mobil Oil's purchase of retailers like Marcor and Montgomery Ward. He also listed various businesses packaged-food giant General Mills owned over the years, including steakhouses, Parker Brothers toys, Izod shirts, coins, stamps, travel companies, and Eddie Bauer stores. Lynch wrote: The 1960s was the greatest decade for diworseification since the Roman Empire diworseified all over Europe and northern Africa. It's hard to find a company that didn't diworseify in the 1960s, when the best and brightest believed they could manage one business as well as the next. Lynch told one tale of diworseification that's particularly valuable for investors... He compared two shoe manufacturers – Melville and Genesco – that both diversified into other businesses, with radically different results... In the late 1950s, Melville made shoes for its Thom McAn shoe stores. It put shoe departments in other stores, including Kmart. Melville's earnings soared after Kmart started expanding rapidly in the 1960s. Through Kmart, Melville gained experience in discount retailing. It used that to acquire discount drugstore chain CVS in 1969, discount-clothing retailer Marshall's in 1976, and Kay-Bee Toys in 1981. As foreign manufacturers took over the shoemaking industry, Melville transitioned its business. By 1982, it was down to just one shoe factory. Next, let's consider Genesco. Starting in 1956, Genesco went nuts with acquisitions. First, it bought department stores Bonwit Teller and Henri Bendel, jeweler Tiffany, and variety chain Kress... Then it got into all kinds of different businesses it couldn't possibly have known much about: security consulting, knitting materials, textiles, blue jeans, "and numerous other forms of retailing and wholesaling," according to Lynch. Sales rose, but the company wasn't becoming more profitable. Both stocks fell in the bear market of 1973 to 1974. Melville rebounded and was a 30-bagger by 1987. Genesco never recovered. So it's possible to be a shoe company and eventually get into selling toys, clothes, and medicines. But if your expertise is making and selling shoes, maybe security consulting and textiles (a low-margin, highly cyclical commodity business) aren't your thing. But that doesn't mean nobody can have all kinds of totally different businesses under one roof... When I mentioned how diworseification ran rampant in corporate America in the 1960s... did one particular company that started buying other businesses during that decade by any chance come to mind? Yes, I'm talking about perhaps the greatest and perhaps most disparate set of businesses ever to exist under one roof: Berkshire Hathaway (BRK-B). Warren Buffett started buying shares of Berkshire Hathaway, then a textile maker, in 1962. (Maybe you're even old enough to remember "the man in the Hathaway shirt.") He accumulated enough shares to take control of the company in 1965 and remains chairman and CEO today. He kept the textile business open until 1985. But by then, Berkshire had become something quite different. Buffett opened his 1985 shareholder letter excitedly discussing the company's recent purchase of a large position in media giant ABC/Capital Cities... its acquisition of home products manufacturer Scott & Fetzer... and its 7% stake in the Fireman's Fund insurance group. Only later in the letter did he discuss exiting the textile business that gave Berkshire its name. The reason was simple: It was losing money and had no hope of ever doing otherwise again... Berkshire kept buying all kinds of business and today, of course, it is a powerhouse. It owns See's Candies, Geico insurance, the Dairy Queen fast-food chain, Fruit of the Loom undergarments, BNSF Railway, Benjamin Moore paints, Acme Brick, Clayton Homes, NetJets private-jet service, Pampered Chef kitchenware, Ben Bridge and Helzberg jewelry stores... and dozens and dozens of other companies, more than 60 in all. It owns partial stakes, either privately or through the stock market, of many more. As of the end of 2023, Berkshire's biggest stock market positions are a huge position in Apple worth $173 billion, Bank of America ($34.8 billion), American Express ($28.4 billion), Coca-Cola ($23.6 billion), and Chevron ($18.8 billion). All in all, Berkshire owned about $353.8 billion worth of stocks at year end. The businesses it owns generated $37.4 billion in operating earnings last year. The company has a market cap of roughly $886 billion, making it the seventh-largest stock in the S&P 500 Index. The obvious lesson is that acquiring businesses is a separate skill from running a business and can be a great business itself. But it's like anything else... You have to focus on it intensely over decades to become really successful. And that brings us to what you and I do with our hard-earned, diligently saved capital... You and I are, like Buffett, in the business of acquiring stakes in other businesses... Never forget that owning stocks is the same as owning businesses. You want to own the best ones, and you don't want to pay such an exorbitant price that you'll never make a good return... even if you're right about the business being great. Nvidia (NVDA) is the easiest example of a company that's firing on all cylinders but very likely priced to provide a lousy (if any) return over the next several years. The stock market being the emotional roller coaster it often is, Nvidia will likely collapse at some point... probably when everybody realizes that AI has been hopelessly overhyped and that Nvidia's growth is on an unsustainable trajectory. Trying to branch out from smartphones into the automotive industry is another example of a bad bet... which Apple figured out only after wasting more than $10 billion. In addition to quality and price, you should probably learn to be more careful investing in certain industries, like biotechnology, mining... and any stock that doesn't yet have a viable business. You should probably learn more about industries like software, insurance, health care, financial services, and other places where lots of good businesses can be found. And take a page out of Lynch's book by learning to invest in things you know well. If you own a motel or a hotel, you should probably learn more about publicly traded hospitality companies. If you sell clothing online, maybe you'd want to learn more about all the clothing-related companies. If you're in banking, check out publicly traded banks. If you sell cars, look at carmakers and auto dealers. You get the picture. You can become a good generalist investor who, like Buffett, doesn't focus on one industry (though his love of insurance is a huge, important part of Berkshire's success). But you'll probably be a better generalist by taking Lynch's advice and starting with industries you already know something about. From there, you can diversify throughout your investing career into other industries, just like Buffett has done. Just make sure you aren't diworseifying into businesses you don't understand. --------------------------------------------------------------- Recommended Links: [Here's What You Missed Last Night]( Marc Chaikin has traded through 13 presidential elections during his 50 years on Wall Street. Today, he's stepping forward to warn of a critical election-year event with a 90% chance of hitting U.S. stocks in the days following Super Tuesday. See exactly what's coming... and exactly what to do with your money, BEFORE March 5, [right here (includes two free recommendations)](. --------------------------------------------------------------- [Gold Is Headed Above $3,000 per Ounce (Here's How to Play It)]( With so many strange events happening across the economy (the longest bear market for bonds since the Civil War... unprecedented bank closures... and soaring prices), it's no wonder the richest investors are loading up on gold. But what you might not realize is there's a much better way to profit from rising gold prices – WITHOUT ever touching an ETF, mining stock, or even bullion. [Find the full details here](. --------------------------------------------------------------- New 52-week highs (as of 2/29/24): Advanced Micro Devices (AMD), Amazon (AMZN), A.O. Smith (AOS), Atkore (ATKR), American Express (AXP), Pacer U.S. Cash Cows 100 Fund (COWZ), Copart (CPRT), Salesforce (CRM), Commvault Systems (CVLT), Dell Technologies (DELL), Enstar (ESGR), Diamondback Energy (FANG), Comfort Systems USA (FIX), GEO Group (GEO), Home Depot (HD), Iron Mountain (IRM), JPMorgan Chase (JPM), Lennar (LEN), NVR (NVR), Parker-Hannifin (PH), ProShares Ultra QQQ (QLD), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), VanEck Semiconductor Fund (SMH), Spotify Technology (SPOT), Cambria Shareholder Yield Fund (SYLD), Textron (TXT), ProShares Ultra Semiconductors (USD), Veeva Systems (VEEV), and Vanguard S&P 500 Fund (VOO). In today's mailbag, we received a few messages from folks wondering if they can still access last night's election-year briefing from Marc Chaikin, founder of our corporate affiliate Chaikin Analytics. The short answer is, yes, [you can watch a free replay here]( – and we suggest you do... Thousands of people tuned in last night to hear Marc's outlook on how this presidential-election year could dramatically impact the stock market... as soon as Super Tuesday next week. Marc also shared a pair of free recommendations – his top buy and sell right now – to everyone who tuned in. You can still hear those, for free, on the replay. On a related note, stay tuned for more from Marc in this weekend's Masters Series. And, as always, send your comments and questions to feedback@stansberryresearch.com. Good investing, Dan Ferris Eagle Point, Oregon March 1, 2024 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,359.6% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,313.8% Stansberry's Investment Advisory Porter wstETH Wrapped Staked Ethereum 02/21/20 1,173.5% Stansberry Innovations Report Wade ADP Automatic Data Processing 10/09/08 905.0% Extreme Value Ferris WRB W.R. Berkley 03/16/12 762.3% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 625.9% Retirement Millionaire Doc BTC/USD Bitcoin 01/16/20 545.4% Stansberry Innovations Report Wade HSY Hershey 12/07/07 461.2% Stansberry's Investment Advisory Porter AFG American Financial 10/12/12 444.6% Stansberry's Investment Advisory Porter TT Trane Technologies 04/12/18 353.5% Retirement Millionaire Doc Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 4 Stansberry's Investment Advisory Porter 3 Retirement Millionaire Doc 2 Stansberry Innovations Report Wade 1 Extreme Value Ferris --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 2,291.8% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 1,529.8% Crypto Capital Wade ONE/USD Harmony 12/16/19 1,213.2% Crypto Capital Wade POLYX/USD Polymesh 05/19/20 1,058.8% Crypto Capital Wade MATIC/USD Polygon 02/25/21 889.1% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Microsoft^ MSFT 12.74 years 1,185% Retirement Millionaire Doc Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. 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