It is not rare these days to hear optimistic expectations about Apple Inc. Prognoses of share price of over than $1000 does not miss. And good real financial results usually prove the optimistic expectations. So investors become more and more optimistic and buy more and more shares, pumping this way the prices up. But I think the big risk for Apple is in its big success. At current moment Apple is monetizing not only its real business success, but also the ultra optimistic expectations of investors. I think a serious tribute to the price of Apple’s shares is coming from expectations. So in fact the price of shares contains of 2 parts – a part based on real financial data and great sales, and a part based on expectations of future success. I think this second part is already too big and is becoming a major risk for Apple.

Business models based on expectations are very close as characteristics to Ponzi schemes. While in Ponzi there is a lie and a crime, with Apple case there is no such things, but there is their equivalent – a massive psychosis and even “blind faith” in the future of the company. Although not lied by anyone the investors are lying themselves and this way they are buying shares just like with Ponzi scheme.

No one will go to jail like Madoff when all this crashes. There is no crime. But the losses will be the same as with Ponzi.

One of the major problems with expectations-based investments is the need of continuing increase of expectations and results. As every investment is based on high expectations, so the real results must be better than the expectations to keep the shares’ price. But as this happens, it inspires new and higher expectations.

This system can not be endless. I think that fantasy-forecasts of $1000 per share are a sign of closing to turning point. Such prognoses are usual when the expectation bubble is close to its peak. This month Apple has beaten all optimistic prognoses and this pumped its shares price more than 8% up just in hours. But this super-success has already created expectations for even better and better next quarters and years. I don’t think Apple will succeed to keep this crazy trend for a long time.

In fact Apple is in a super-success trap. It is not a fault of Apple. It is just an element of market craziness. But every company involved in this spiral is enslaved by it and even pressed for irrational decisions. I mean that with no that crazy rise of shares-price the company could follow its well planned long term strategy and make stable and rising profits. But involved in spiral it thinks not only about profits, but also about the Stock Exchange and how to keep the value of shares. And when this value has much artificial “bubble” components, keeping the price can even damage the company by provoking irrational decisions.

Apple is in strong business situation with good sales and much cash in reserve. But it must understand the expectations trap that it is falling in, and take measures against mass psychosis around its shares. This may mean little lower bonuses for managers now, but will help avoiding big turbulences in future.

And for investors is good to awake and stop dreaming of $1000 per share.

Dobri
April 29th 2012