Assume you have $500 to invest and you are trying to decide which one is a better bet.  Let’s see.  On June 10th, Microsoft opened near $25 and Apple near $250.  So you could buy 20 MSFT or 2 AAPL.  So what are you really buying with your hard earned bucks?  Based on the prior 12 months and latest financial statements these are the numbers (rounded):

AAPL:  revenue $51B, Net Income $10.7B, Cash and Short term investments $23B, and a market cap of $227B (908 M outstanding shares).

MSFT: revenue $59B, Net Income $17.2B, Cash and ST investments $39B with a market cap of $218B (8720 M outstanding shares).

So if you buy 2 shares of Apple your $500 buy you $112 in revenue, $23.50 in NI, and $50.70 in cash.  Microsoft’s 20 shares are $135.3 in revenue, $39.4 in NI, and $89.4 in cash.  In other words, picking one metric, let’s say cash,  Microsoft is trading at 5.6 times cash, Apple at 9.8 times cash.  That is 1.76 times more expensive!

Now, let me throw Google (GOOG) into the mix, just for kicks:  Google was trading at around $480 with a market cap of $115B (240M shares).  Revenues of $25B, Net Income of $7.1B, Cash $26B.  You can buy 1.04 GOOG, meaning $108 in revenue, $30.8 NI, and an impressive $113 in cash (4.44 times cash).

So you tell me which one is more expensive?  I know, I know, this is based on past results and does not factor in growth potential, investor’s sentiment, cult followers, and other factors.  But for the same reason it clearly paints a picture of which company is more favored by investors and which one is less.

Consider one last point:  Microsoft hit an all time high of $58.37 on December 31, 1999, Google $724.80 on December 14, 2007, and Apple hit $272.40 on April 26, 2010.  Investor’s favoritism has been shifting over time.  What’s next for all these three?  If I knew, I wouldn’t be blogging about it but it is definitely interesting behavior of 3 of the most traded stocks.

Quoting Scott Adams, the creator of Dilbert, “I remind you to ignore me”.  By no means this is an endorsment to invest in any of these companies.  You, my fellow reader (singular) make your own judgment.

Enjoy.

Cramer writes as he speaks: a little too cocky, self confident, straightforward, candid, and with a couple of “insider” jokes that make you think he is the only one that finds them funny. It is a great flight book (that is a book to read on a boring 6 hour flight). That being said, the book is a good collection of sane (yes, I said sane) advices for the novice and no so novice investor. His stock-picking rules are a good organized way to summarize the basics of disciplined investing / trading. I have two pet peeves on his recommendations: the way he defines diversification (which is not exclusive of Mr. Cramer), and the 5 stock limit for part time investors. Let me explain.

I am not saying that you shouldn’t diversify, but diversification is different for each investor. If you call his show to the “am I diversified” segment and tell him: “I own EBAY, GOOG, AAPL, CSCO, and QCOM” i can hear the screams all the way from here: “They are all tech!!, are you crazy????” The firs statement is true, the second … well, I don’t know for sure, but not because you own those stocks. EBAY is really online retail, Google is advertisement; Apple devices; Cisco, infrastructure, and Qualcomm, chips. True, there may be some correlation between them, especially between QCOM and AAPL (iPhone uses silicon chips). But based on fundamentals they really address very different markets and their revenues are not so closely tied. Technically, they might be closer since most investors aren’t tech geeks so they think they are tied together more than they really are. If you work in tech like I do, you can distinguish the differences between these sub-categories and be diversified within a sector. Moreover if you work in tech you have to monitor these companies.

Cramer also suggests to own a minimum of 5 stocks to consider diversified, and he even goes through rules of how to pick the categories of these 5. He also suggests that more than 5 is too many due to the “buy and homework” strategy, arguing that you can’t devote enough time to do homework on more than 5 stocks and still have a day job. My opinion is that like everything else in life it depends. Following on my example above I have to know about the 5 companies I highlighted below for my day job, so I can afford to own stock of more than 5 if I can dedicate my moonlight hours to do “homework” outside of my area of expertise.

One last comment: I think Cramer overlooks one additional cardinal rule of investing. That is keep a balanced portfolio. Diversification doesn’t mean a lot if you own 5 stocks but 80% of your portfolio is in only one. Index funds that follow the Dow Jones or S&P are another fallacy of proper diversification like I explained here.

Enjoy.

We hear all the time that investing in stocks is the best way to grow your money in a passive way.  Over the long run stocks have always outperformed other asset classes.  hmm…  let’s see:  The Dow Jones Industrial Average (DJIA) closed at around 380 points on August 1, 1929 with a volume of some 3.8 million shares.  80 years seem like long term, right? $1000 invested in the DJIA on August 1, 1929 will be worth today, May 1, 2009 $21, 529 with a volume of around 10 billion shares.  Pretty good.  If we assume a 3% inflation rate for 80 years, it is equivalent to $2029 in 1929 dollars.   The chart on top shows our inflation adjusted grand invested in August 1929, of course backwards.  We doubled our money in 80 years! It doesn’t seem like a lot, now does it?

But don’t worry by July 1954 (25 years later) you will have your $1000 back.  The DJIA closed at 386 points with a volume of  roughly 3.3 million shares.  Of course, discounted for inflation it was really the equivalent of $486 1929 dollars.  By Christmas 1963  the Dow closed at 783 points with an impressive volume of 5 million shares.  You now have $2006 (or $734 1929 dollars), so let’s keep going.  By March  1983, the 1100 points of the Dow meant $3000 ($602 1929 dollars).  In January 1987 (yes 58 years later) you will finaly have the equivalent of $1000 in 1929 dollars ($5600 1987 dollars) just to see the market fail on you by November.  But worry you not, a year and a half  later you’d be back to your grand in March 1989 (2342 points and a volume of 177 million shares).  You’ll be cruising through the nineties to double your money by March 1996 when the volume was reaching half a billion shares and a close 5580 points.  That is really where you are today.  If you’re curious, the memorable peak of December 2007 of 13500 points will have meant roughly $3500 in 1929 dollars.

In my opinion, this is really amazing.  According to Wiki Answers, the base price of Chevy AC coupe in 1929 was $695.  So your humble $1000 could have bought you one with $305 to spare.  Your $21,000 of 2009 may buy you a Pontiac that may soon belong in the Smithsonian.  The Nissan Versa, the least expensive car in the US is worth around $10,000 according to Edmunds.com. so maybe you’re ahead a little bit.  The point is that popular wisdom of investing in an index and forgetting about it may not be the best for your money.  I know, I know, I picked the worst possible date to invest my humble grand, but it makes the point I want to make.  Manage your investments, because if you started in 1999, you’re still behind today.

In case you’re wondering, the volume figures have no influence on the dollar values, but I found extremely interesting that multiple billions of shares change hands every day  just  on the 30 components of the Dow.  The popularization of stocks is amazing, but also dangerous, but that is a topic for a different post.

Enjoy.