NEW YORK (
) -- Every investor on Wall Street is trying to solve the mystery of
Some call it a catalyst-driven stock. Others dissect the fundamentals. Traders have a field day riding its volatile ebb and flow. Jim Cramer says all anyone wants to talk about is Apple. As investors around the globe try to understand this stock, an interesting phenomenon is beginning to unfold. We're witnessing a case study of the unintended consequences of secrecy.
Never has a company single-handedly determined the direction of technological innovation like Apple. Competitors can't develop a smartphone without copying the iPhone. Competitors don't want to release a Tablet before seeing what Apple has come up with. Microsoft abandons its own R&D and mirrors Apple with Windows 7 and Microsoft Retail.
In this king of environment, Apple has become more secretive than ever. Leaks about new products or quarterly sales never come from headquarters anymore. Steve Jobs has successfully transformed Cupertino into his own Willy Wonka factory. It's time for investors to more fully understand what this means for the stock.
As I explain in my book,
The Alpha Hunter,
mystery is a powerful catalyst for movie production, but it has a powerful effect on investing as well. In the absence of company press conferences and official statements, rumors fill the vacuum of silence.
When was the last time you went to the Apple Website to find news about the company? Probably never. Instead, investors flock to Apple rumor sites and hang on every word that comes out of an analyst's mouth. Analysts have become the official spokesperson of Apple.
What are the unintended consequences of this backwards PR structure? It means that people with conflicts of interest can move the stock in the short run. By my estimation, six of the central stock drivers over the last four months have all been based on unknown rumors that appear to be false.
But because Apple never comments on news, the stock reacts to each and every one. Hedge funds take advantage of perceived vulnerabilities that originate from the rumor machine and individual investors are left scratching their heads in confusion. Because of secrecy and the resulting lack of transparency, the rumors from unofficial spokespersons move this stock like no other.
Do you think Steve Jobs is going to read this and say, "Schwarz is right, we need to provide more investor transparency!' Not a chance. So what should investors do about this stock that is a victim of the Wild West? There is only one thing you can do. Invest for the long term.
Anyone who owns short-term options or who is trying to make a quick trade is at risk of the unintended consequences of secrecy. Rumors can strike this company on any given day for good or for bad. You need to rise above the noise and allow the fundamental growth of the company to properly value the stock over time.
In the short run positive uncertainty will cause a stock to soar; negative uncertainty will cause a stock to plummet. But in the long run, the stock will price itself based on the success or failure of the iPhone, the Mac, the iPod, the App Store, etc...
At the time of publication, Schwarz is long Apple.
Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at www.economictiming.com. Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.