manchester capital management

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1 THE SAM LETTER manchester capital management Welcome TO Manchester Capital s SAM: Stuff About Money! In this issue we re going to talk about stocks. What Is a Stock? Do you want to own part of a business and make money without having to show up at the office every day? Or ever? Then stocks may be a good investment for you. In simple terms, a stock gives you ownership in a company. If the company grows and makes a profit, your investment should grow, too. If the company doesn t, you ll probably end up losing money. Companies usually issue stock to raise money. A company s directors and officers decide to give up some control of the company to raise money to expand the business. The company sells stock directly to investors in a practice called an Initial Public Offering (IPO). In this process, the stock is usually listed on a stock exchange, and investors receive a stock certificate, which shows how much stock they own. The New York Stock Exchange is the largest stock exchange in the world, measured by dollar value; today, there are over twenty major stock exchanges worldwide. After a stock is listed on an exchange, investors can sell their stock to other investors. When a new investor buys stock on an exchange, the company does not receive any money from the transaction. All proceeds from the sale, minus any commissions to stockbrokers, go to the investor who sells the stock. The stock buyer now owns a piece of the company. Investors who own stock in a company are referred to as stockholders or shareholders. An important benefit for shareholders is their right to vote on important

2 issues affecting the company. Usually, shareholders get one vote per share of stock. A common activity shareholders get to vote on is electing the board of directors. The board is a group of individuals who oversee major decisions made by the company. Boards decide how the money the company makes is spent. Decisions on whether a company will invest in its future growth, buy other companies, pay a dividend, or repurchase stock are all decisions made by the board of directors. Another important benefit to being a shareholder is that the most money at risk is the value of the investment. The government views shareholders and the corporations they own as separate entities. If the company does poorly, the most investors can lose is the value of the stock investment. This is a significant benefit to owning stocks, because while potential loss is limited, the potential gain is not. If the price of the stock goes to zero, you lose all of the money you invested. However, there is no limit to how high the price of your stock could go over time. Why Does a Stock s Price Change? In theory, the price of a share of stock is equal to the value of the company divided by the total number of shares of stock the company has outstanding. Determining the value of a company is not easy, because value is influenced by a number of factors, like how profitable the company is, how well it s managed, how well it performs compared to its competitors, and what s happening in the larger economy. In general, the stock s share price is likely to increase when the company performs better, and to decrease when the company does not do as well. Let s look at one company and how its successes and failures have affected the value of its stock over time. 02

3 THE SAM LETTER manchester capital management apple The company is a familiar one: Apple Computer. It all started when Steve Jobs and two of his friends, Steve Wozniak and Ronald Wayne, built a kit for a pre-assembled computer circuit board, designed a logo and wrote a manual. The computer was called the Apple I, and Jobs, Wozniak and Wayne founded Apple Computer to market and sell it. Though their first computer was not a hit at first, before long Apple had established itself as one of the biggest forces in the computer industry, and it continues to innovate today. Since Apple is a technology company, it faces many challenges common to most other tech companies even ones as large and successful as Microsoft. As we know, technology is constantly changing. Just ten years ago, few people had thought of owning a portable mp3 player, and nobody had heard of the ipod. With things changing so quickly, companies like Apple must constantly develop new technologies. With these challenges, Apple has had many ups and downs, affecting the value of the company and the price of its stock. In the chart that follows, we ll look at some events in Apple s history, and how they have affected the stock price. Apple stock trades on an American stock exchange called the National Association of Securities Dealers Automated Quotation System, known as NASDAQ. Its ticker symbol is AAPL.

4 Apple Computer is founded by friends Steve Jobs, Steve Wozniak and Ronald Wayne to sell a computer they built in Jobs parents garage. The Apple I sold for $666. January, 1983 The Lisa (named for Steve Jobs daughter) was the first commercially available computer to use the now-familiar system of using a mouse to click on files. Its $9,995 price tag was too high for most buyers, and it s still considered one of Apple s biggest blunders. May, 1985 Aldus releases PageMaker 1.0 for the Macintosh. Along with the $7,000 Apple LaserWriter printer, the Macintosh has finally found its niche: desktop publishing. Mailboxes and campuses are inundated with Mac-generated fliers, newsletters and brochures. September, 1985 Apple loses over $17 million in a three-month period, and CEO John Sculley restructures the company, leaving 30-year-old Chairman Steve Jobs without any day-to-day responsibilities. He quits the firm he co-founded and founds NeXT Computers, paring his Apple stock holdings to a single share. 20 January, 1986 Macintosh Plus breaks the 512-kilobyte RAM barrier and ships with a whopping one megabyte of RAM. The machine is a huge success, selling in the hundreds of thousands before it s retired in Apple Stock Prices / / / / / / / / / / / / / / / / / / / / / / /

5 THE SAM LETTER manchester capital management October, 1991 Apple s PowerBook brings portable computing within reach. Its smaller size and more ergonomic design make it the model for many modern laptops. Apple and IBM agree to a technology-sharing alliance that also includes Motorola. The partnership creates the PowerPC chip, which powers an entire generation of Macs. May, MAY, 1994 The Mac s tenth anniversary launches three new models with the new PowerPC chip. For the first time, Apple prices are competitive. Later that year, Intel recalls its Pentium chips due to a flaw and Microsoft delays its new operating system, Windows 95 good news for Apple. August, 1995 Apple s new laptop becomes the laughingstock of the industry when a defect causes its battery to burst into flames while being recharged. Although Apple corrects the problem and cuts prices to dealers, there s a lot of bad press. Meanwhile, Windows 95, which Apple users call a poor imitation of the Macintosh operating system, sells 1 million copies in its first four days / / / / / / / / / / / / / / / / / / / / / / / / /1989

6 AUGUST, 1998 The Macintosh returns to an all-in-one design, with different colored cases. The machine is a hit and saves Apple s consumer market. More than 6 million of the original-edition imacs are sold by early 2003, when the model is retired. November, 2001 Finally, a Mac gadget sticks. The ipod s timing and design are just right, and the device embodies the Macintosh spirit of being simple, elegant and personal. Apple announces it will abandon its previous operating systems in favor of a new, next-generation system, Mac OS X. The system is based on work Jobs did at NeXT during his time away from Apple, and its roots in the Unix operating system give it power and stability. April, 2003 Building on the success of the ipod, Apple starts selling online music for just 99 cents per song, downloadable directly into an ipod. By February 2006, Apple has sold 1 billion songs. 200 we changed the scale of the chart on these pages because the stock price increased so much / / / / / / / / / / / / / / / / / / / / / /

7 THE SAM LETTER manchester capital management January, 2006 Steve Jobs stands with Intel CEO Paul Otellini of the rival Windows/Intel alliance to show the first Intel-based Macintosh. There s some wild speculation that this may be the first step toward Apple-manufactured PCs that can run Microsoft Windows. June, 2007 Apple unveils the iphone and turns the smart phone industry upside down. This is not just another phone it s a platform delivered on a handheld device, raising the bar for all smart phones and starting a wave of innovative new product features from competitors. june, 2008 Apple s market cap (which represents the company s total value, calculated by multiplying the number of Apple shares by the price per share) has exploded from less than $2 billion when Jobs returns to more than $150 billion, with a 14% share of the home computer market to boot. What will Apple s future and its stock price look like? Nothing is certain except that it s bound to be as full of surprises, innovations, and ups and downs as the company s last 30+ years have been. Isn t it amazing, though, to think that if you had bought one share of Apple stock in 1984 for $3, it would be worth over $160 today? That s an annual growth rate of over 18%. If you bought the stock in 2001 and held onto it, the compounded annual growth rate for your investment would be over 40%! $ / / / / / / / / / / / / / / / / / / / / / / / / /2002

8 Ask SAM Q. What is GDP and why is it important? A. GDP stands for Gross Domestic Product, an important measure of the health of a country s economy. GDP represents the total goods and services a country produces over a specific time period, typically reported every three months. In the United States, about 70% of what is produced is for personal consumption, and the other 30% is used for investment and government spending. GDP is important because we can use it to determine whether the economy of a country is growing more quickly or more slowly than the previous quarter. GDP is also used to compare the size of economies throughout the world. Q. What is a Recession? The official definition of a recession is when Gross Domestic Product (GDP) growth is negative for two consecutive three-month periods or more. Many people who study the economy also look at other economic indicators to determine whether a country is in a recession. For example, when there is a combination of a decline in industrial production, higher unemployment, a decline in income, and falling housing prices, many experts will say the country is in a recession. If you d like to suggest a topic or have a question you d like answered in the next issue of Ask SAM, just us at info@mcmllc.com. Manchester, Vermont // 3657 Main Street // (P.O. Box 416) // Manchester, VT // {Tel} // {Fax} Montecito, California // 1155 Coast Village Road // Montecito, CA // {Tel} // {Fax}