Apple vs. Bank of America: A Vital Comparison Every Investor Should Know

Simplified, there are two pillars of successful investing:

  • Buying good companies.
  • Buying them at good prices.

Huge wins take place when you get both right. Near-certain losses occur when you get both wrong. Getting just one right can lead you either way. Sometimes great companies perform poorly because valuations are too high, and sometimes miserable companies produce extraordinary returns if starting valuations are low enough.

Two weeks ago, I sat down with Robert Arnott, CEO of Research Affiliates and one of the brightest minds in modern finance. He made a similar example with two popular companies: Apple (Nasdaq: AAPL  ) and Bank of America (NYSE: BAC  ) . Have a look (transcript follows):

Robert Arnott: "Most people lack the discipline to do that kind of cool, collected contra trading because it's wildly uncomfortable.

Recently I've been using Apple versus B of A as an interesting example. Apple's beloved; everybody loves it. Everybody wants it in their portfolio. Practically everybody has it in their portfolio, and B of A is a much bigger company trading at much lower market cap. So is B of A going to be a more successful business than Apple? Highly doubtful. But you're already prepaying for that success in Apple's price. You're already prediscounting for disappointments in B of A, so I'd much rather own B of A than Apple."

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  • Report this Comment On December 29, 2012, at 8:55 AM, BLC4EXPERT2 wrote:

    The Fool has become so crowded with advertising it has become difficult to find real insight and value.

  • Report this Comment On December 29, 2012, at 11:05 AM, lngtrmcptlgns wrote:

    With a P/E under 12, how can it be said that anyone is pre-paying for success with Apple?

    Obviously, Mr Arnott thinks the P/E ratio says very little about valuation. Interesting.

    I understand that a huge run-up in earnings is almost never sustained, so sometimes that makes an attractive P/E more shaky for a company that has performed like Apple in recent years.

    Trees don't grow to the sky. It is harder and harder to keep growing at a rate that the market has come to expect, and as soon as they stumble the market will punish harshly.

    The thing that scares me about Apple is that in the tech consumer space we have seen powerful brands lose their steam before. Sony comes to mind.

    And why does he say B of A is a "much bigger company" than Apple?

    I am totally down with value investing, but as someone who likes to buy and hold (forever if possible) I don't see B of A's current beaten-down status trumping Apple's "better business" status in the long run.

    Over 5 years, certainly. Not 25.

    Anytime I hear anybody talk up or down a stock I wonder "what kind of holding period are you talking about". So often this goes unsaid (and unasked) and of course it matters alot.

    Are we flipping houses here or buying and holding for the rest of our lives?!

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