Neil Cybart: Why Apple doubled

Much of the run, he says, can be attributed to the underlying dynamic between active and passive investments.

From “Apple’s $500 Billion Year on Wall Street,” ($) mailed to Above Avalon subscribers a couple weeks ago, but more relevant with every new all-time record close.

My suspicion is that Apple’s stock price run isn’t driven by any single business-related item. The move is simply too large. Instead, a $500 billion market capitalization increase points to a wide variety of investors wanting greater Apple exposure. This increased interest results in higher stock prices since a stock price is nothing more than the spot where demand for shares equals the supply of those shares.

Why do these investors want more Apple exposure? Instead of looking at Apple’s business for potential answers, we have to look at the multifaceted dynamic found with passive versus active investing.

Passive investing (index funds) are on the rise as investors are becoming increasingly disenchanted with mutual funds and active funds charging for underperforming the market. As more funds are poured into passive investment vehicles, all of the Wall Street giants (Apple, Microsoft, Amazon, Alphabet) benefit. By accounting for 4% of the S&P 500, 4% of every dollar put in an S&P 500 index fund is allocated to Apple. While this mechanism doesn’t necessarily lead to Apple’s share of the overall market increasing over time, it can lead to sustained demand for shares regardless of business fundamentals. This is key as active investors, and their constantly swinging perspectives on stocks, lose power to sway stock prices. While passive investing on its own doesn’t explain a $500 billion increase in Apple market cap in 2019, it likely is a contributing factor to what may be happening.

In a scenario where active investors (hedge funds, mutual funds, pension funds, etc.) were running with historically low exposure to Apple for whatever reason, a scenario in which Apple began to materially outperform the market would place pressure on these active investors given how they are often graded against a market benchmark. Given how Apple represents 4.3% of the overall S&P 500, a 77% move in the stock will likely make or break an active investor’s year depending on whether or not they own the stock.

The most likely explanation for Apple’s run up — however simplistic it may sound — is that active investors have been desperately trying to increase their exposure. The stronger demand for shares leads to higher stock prices in order for demand to match supply.

My take: I think this may be what BMO’s Brian Belski was trying to get at yesterday. See here.


  1. David Emery said:
    It doesn’t say much about the active investor community as a whole that they were (and apparently still are) under-represented in AAPL. That shows a failure to do quality research (one -hopes- they don’t depend on the public ANALysts whose track records are so well documented here…) Given that poor performance, I see no reason to put my $ into anything other than passive funds.

    January 10, 2020
  2. Fred Stein said:
    Yes, and Brian pointed out that International funds are just starting to move into US large cap. Further, as long as the economy remains strong, money flows into the 401Ks and pensions for both active and passive investments will keep demand for AAPL strong.

    Apple now fits three categories, growth, dividend (with a long term view), and safety.

    On safety – Over the last run-up, buyers jump in at every dip. And we have buybacks.

    January 10, 2020
  3. Gregg Thurman said:
    To hell with active or passive investors, what about individuals, dissatisfied with their mutual performance, questioning those funds about their exposure to AAPL, who then withdraw from said funds and invest directly into AAPL.

    January 10, 2020
    • David Emery said:
      I have 1 active fund left in my retirement portfolio, I dumped the other one a couple weeks ago. I just don’t think that -most- fund manager performance justify the fees they charge.

      January 10, 2020
    • Aaron Belich said:

      That’s where my journey with becoming a direct AAPL shareholder began. My 401k Plan killed off their science and technology sector actively managed fund, which had been my best performer (even with the higher fees factored in) for years, and that’s when I started learning about all this and taking more control over my savings and retirement.

      Sadly, I wished my wife and I had started learning about all of this when we were kids, a mistake I will not allow to be repeated with my own children, their friends and classmates.

      January 10, 2020

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