SPENCE Asset Management

Great Job, Jobs September 2011

Steve Jobs of Apple Computer announced his retirement late in August. Sadly, it was failing health that forced him to hand over the reins of the premier consumer products company to a new CEO. Apple is not a company that we currently own nor, unfortunately, did we own over the last ten years. It is interesting to be on the sidelines as the career of one of the most influential men in consumer technology comes to an end.

Stephen Jobs has often been credited with the great innovations and global reach of Apple Computer. History teaches us that Jobs was not always the darling of the Apple board of directors. At one point, Steve Jobs was fired by the Apple board. Since the re-hiring of Jobs, we have watched Apple return from the brink of obsolescence to the producer of almost every “must-have” personal consumer technology product. Look around: Apple has saturated the daily lives of the masses in most developed countries with gadgets. The Jobs story is compelling- his vision forever changed the music industry with I-pods and then I-tunes. Jobs also fostered a major transformation in animated film with his contributions to Pixar. Though perhaps a bit rough around the edges when it comes to inter-personal skills, Jobs’ career was nothing short of incredible.

As investors, how did we miss Apple? The first part of that answer is pretty easy for us because it revolves around the current dilemma for Apple shareholders: from here, the Apple shareholder faces a great unknown. Technology junkies are already wondering if and when Apple will come up with something else they can’t live without. Will the company be able to continue to lead technology with its innovation and user friendly devices? That is the 64 billion dollar question and only time will tell.

The second part of the answer to the question of how one can miss out on an Apple Computer play brings us to highlight one of our 12 key principles that we use to rigorously test each and every company we evaluate. One of our most crucial principles relates to evaluating management- a principle that requires us to closely examine those at the helm. We prefer a strong management TEAM rather than one particularly strong single cult-like leadership dynamic. In the case of Apple, there has been a very strong dependence on Steve Jobs since his return and not the management team as a whole. In our examination of management, we try to hypothesize how a company would handle a new CEO or even a poor CEO. Some companies have such solid competitive positions within their niche that even poor management would have trouble destroying their strengths. Other companies, like Apple, are in businesses that must be at the top of their game every single day. Such businesses are just one stellar gadget (introduced by a competitor) away from disaster. Being smart every single day and the exposure to obsolescence risks tend to be recipes for disaster unless the roulette wheel lands on a healthy Steve Jobs every day. Case in point, another smart phone maker that competes in the Apple space looked “unstoppable” just a few years ago; today, their stock price clearly demonstrates a “stop” in demand for their products.

So, how does Apple fare from here? We don’t any more know now than we did then. And because we have never felt like we did “know,” we made a conscious decision not to own Apple stock. However, with the companies in which we do own shares, our confidence is much higher that the failing health of their CEO’s could not impede the strength of their businesses nor could a new gadget from a competitor rattle the trajectory of their growth.

Looking ahead, money managers aren’t any better at anticipating the next “big thing” than those that attempt to manufacture it. There is a big difference in admiring the sales volume successes of the I-Phone and I-Pad and having a strong sense of certainty about the durable competitive advantages of the maker of those gadgets. At this juncture, there are too many other areas where we feel comfortable that the competitive dynamics are less fluid and less uncertain.

But looking back: great job, Mr. Jobs.

Jim Spence, Eric Walton

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