March 23, 2024 | Apple Lawsuits, Retirement Assets, Investing and Mortgage Points & Lender Credits

Lawsuits Against Apple

On Thursday, March 21st, the Department of Justice (DOJ) filed an anti-trust lawsuit along with 16 states against Apple. The DOJ claims Apple’s iPhone ecosystem is a monopoly that drove its “astronomical valuation” at the expense of consumers, developers and rival phone makers. The lawsuit claims that Apple’s anti-competitive practices extend beyond the iPhone and Apple Watch businesses, citing Apple’s advertising, browser, FaceTime and news offerings. The DOJ also said in a release that to keep consumers buying iPhones, Apple moved to block cross-platform messaging apps, limited third-party wallet and smartwatch compatibility and disrupted non-App Store programs and cloud-streaming services. With pressure also surrounding the App store in the EU, I worry the expected growth from the services business could be under pressure. We have often said Apple is a great company, but trading at such lofty levels has left many investors open to declines in the value of their investment. The stock trading around $170 per share is down from the high of over $200 per share, and while this lawsuit will take a couple years to go through the court system, it could have a major impact on the growth of Apple’s earnings. At Wilsey Asset Management, we do continue to believe that Apple is overpriced and has no potential for growth going forward. Looking out a couple years from now the stock could still be trading around these levels due to the high valuation and limited prospect for business growth. We do believe it’s very possible for the stock to drop at least another 10% to 20%. 

Retirement Assets and Target Date Funds

I was so disappointed to read recently that Vanguard has 63% of their US retirement assets allocated to Target Date Funds. I cannot stress what a poor investment these are. They make nice fees for Wall Street and people think it’s an easy way to retire but the allocation and numbers are just so wrong. A good example is as recent as 2022 when the bond index went down about 14% that year. Based on the theory of Target Date Funds and how they are invested, most of a 65-year-old retiree’s money would be invested in bonds. On a million dollar account a 14% decline would have led to an account value of $860,000 and now a couple years later, bonds are still lower. I do believe in buying and holding, but you must understand what you’re holding and why you’re holding it. It does make sense to just implement a blind strategy. If you have a target date fund, I would highly recommend that you sit down with a knowledgeable financial advisor that really understands and can explain how they work…. Yes, I’m available! 

Mind Games of Investing

I learned a new word this weekend, counterfactual. In my 40+ years of investing I believed what this word meant, but I just didn’t know there was a word that described what I knew. What I’m talking about as it stares in your face where you would have been if you would’ve bought Microsoft, Nvidia or Tesla a few years ago. The emotional psyche is great at tracking the big misses and convincing you why you should’ve invested, but it never seems to remember the investment losses that you missed because you didn’t take that risk. Over the years we’ve talked about these types of companies many times. Just to remind you, take a look at the cannabis companies or during the pandemic had you invested in Zoom or Peloton. More recently, we just discussed in our newsletter about had you invested in electric vehicle companies you would’ve lost about 90% of your investment had you purchased at the top. Investing is hard, throughout your lifetime there will always be some companies that you “knew” were going to go up after the fact. Comeback to reality and realize if you can average about 10% on your investments, in 21 years a $100,000 investment would be worth close to $800,000. But if you lost principal along the way by taking on risk, you may not even have your $100,000. And if one of your friends tells you they bought one of these high flyers and they brag about it, ask them percentage wise how much does it make up of their entire portfolio? More than likely it’ll be less than one percent, but even at one percent be sure to inform them that the investment, even if it doubles in price would only add a one percent increase to their entire portfolio. And if you would like to use the new word counterfactual, the definition is what might have been an imaginary alternative to the actual past. 

Mortgage Points and Lender Credits

When you apply for a mortgage, there’s a lot more to consider than just the interest rate. When you get a mortgage, there are closing costs that include things like title and escrow fees that are not part of the loan itself. Then there is prepaid interest which is the interest that accrues from the closing date through the remainder of the month. Since mortgage payments are paid in arrears, your first payment will be two months after the month you close. For example, if you close your mortgage in the beginning of April, you’ll have more prepaid interest at closing since you’ll have to pay interest for the bulk of April, but you won’t have to make the next payment until the middle of June. Also, at closing you might have points or credits. A mortgage point is an extra fee you pay in exchange for a lower interest rate. A lender credit is the opposite where you receive a higher interest rate, but the lender will provide you funds that can be applied to closing costs and prepaid interest. You can also choose to pay no points and receive no credits for an interest rate in the middle which is called the par rate. For example, if you were to get a mortgage right now your par rate might be 7%, or you could pay a few thousand dollars in points to receive a 6.75% rate, or you could receive a few thousand dollars in credits in exchange for a 7.25% rate. With where interest rates are at now, pretty much everyone agrees that mortgage rates will be coming down in the coming months and years. This means if you are considering buying or refinancing, even if you are using a 30-year mortgage, it is best to think of it as a 6, 7, or 8 month loan as there should be an opportunity to refinance in a few months at a lower rate. Therefore, if you are getting a loan now, you want to structure that loan so you have the lowest overall cost during the next 6 to 8 months. During a decreasing interest rate environment, this typically means accepting a higher interest rate and using the accompanying lender credits to cover as much closing costs and interest as possible. You might pay a few hundred dollars more in interest over the next several months, but that is worth it if you receive a few thousand dollars in credits upfront.