What I bought instead of a new iPhone?

Every time I walked past an Apple store, my heart always filled with joy when seeing customers flocking in at the sound of the opening bell; equally every time a new iPhone model got released, long queues snaked up outside its stores and my heart leapt with delight.
 
Why?
 
Because I am a shareholder of Apple stocks (APPL). It means that I own a small % of Apple Inc. as a company rather than being a buyer of its products.
It also means that every time when you purchase an Apple product, be it an iPhone, iPad or even an app, a tiny portion of the profit of that purchase goes into my bank account.
 

Here’s another story.

Last November I asked Mrs WB40 what she would like as a Christmas present. She wanted the latest iPhone X, which as a strong advocate of Apple, I must attest was an amazing piece of computer engineering.
 
The model she wanted costed over £1,000, which wasn’t a small amount, nor was it massive. The price tag was in the annoying territory where I could afford the gift and yet equally I could think of so many other ways of spending that sum.
I thought about it for a while and offered her 2 options:
  1. I would happily pay £1,000 and buy the iPhone X for her;
  2. Instead of buying the iPhone, I would add an additional 5% onto that amount, purchase the equivalent in Apple shares and gift them into her ISA account for Christmas.
Mrs WB40 chose the #2. Even better, she topped it up to £2k. Extra brownie points to Mrs 40!
 
Why did I do that?
Fundamentally Apple products are distinctively different from Apple shares as an iPhone is a depreciating asset, period.
  • Assuming you are a Consumer, the value of your brand new iPhone drops by approximately 20% the moment you walked out of the store door, without even having taken it out of the bag. Why? Because most countries have a sales tax which cannot be recouped even if you decided to resell your device later on. This is what I call the cost of transaction.
  • Given iPhones are electronic goods whose performance improves at an extremely fast pace (usually a new model is released every year), by definition its lifetime value or LTV (i.e. the number of months the current model of iPhone stays at top range) is finite, meaning that its value would depreciate with respect to time.
  • iPhones are commodities whose supply is relatively elastic (Apple can easily ramp up production should demand shoots through the roof, without incurring significant costs), which means that when it comes to reselling your iPhone, you are competing against others as well as Apple itself and thus price becomes your only leverage. When you are competing with others solely on price then it exerts a negative pressure on your value (your value becomes your price).
On the other hand, Apple shares are the exact opposite. It is an asset whose value tends to appreciate relative to time. Here are the 4 reasons why:
  1. The cost of purchasing Apple shares is extremely low. Stock brokers usually charge £5-10 to trade and thus a £10 commission on a £5000 trade represents 0.2%, or x100 cheaper than the 20% sales tax levied on an iPhone.
  2. The lifetime value of an Apple share is determined fundamentally by its future profitability. I am essentially paying an upfront lump sum for all its future earning potentials. The number of forward looking years people are willing to pay based on the current profitability varies, currently for Apple this is around 19 years. Given that the number of forward looking years is fixed yet the future time horizon and profitability are by definition infinite, then the lifetime value of an Apple share and its potential price gain are equally infinite, at least theoretically. If you had bought £1,000 worth of Apple share (equivalent to an iPhone X) when it was first released in November 2017, your pot would worth £1130 as if today. I challenge you to resell your iPhone X for 13% higher than the price you paid for it.
  3. Apple shares are not commodities. There are just over 5 billion Apple shares in issuance ever. This may sound like a huge number however most of these shares are held by investors who are unwilling to sell. The actually number of shares in circulation at any given point is on average 27m, which is 0.5%. Effectively only 0.5% of the company can be bought or sold at any given point whereas 100% of iPhones in stock are theoretically available for sale.
  4. I get paid dividend for simply holding Apple shares (and doing nothing) because being such a profitable business, Apple generates cash at a faster rate than it can invest effectively, therefore it just distributes part of that profit to its shareholders. It’s always nice receiving a cheque from them every quarter that pays for a mini weekend break (passive income in its finest). Does your iPhone pay you for holding it?
 
Do I have an iPhone? Yes I do!
 
Undeniably there are inherent utilities iPhones offer that cannot be replaced by its shares. Without my iPhone this post would have not been written. I’ve had 3 models in the past 5.5 years, because the software had become too advanced and thus slow for my ageing models. I usually observe the following rules when it comes to replacing my handset:
  • Never go down the pay-monthly route, always pay upfront, because the cost of finance is very expensive (around 15% APR)
  • Always buy the model that is one generation older. This way the performance remains excellent yet you usually pay at least 20% less
  • Try to buy it second hand

Wrap up

You don’t need the latest iPhone model every time it is released, even if you are loaded with cash, because there are much better ways of spending £1,000.
 
However if you are a loyal member of the queue outside Apple stores during every release then I thank you, for you are helping me to grow my wealth every time you queue (and I’m usually still asleep during that period).
 
If you were offered the latest iPhone model or an equivalent amount in Apple share, what would you do? Please comment away.