How I made a small fortune at Apple Computer

Principle 1: Free financial advice is worth every penny you pay for it.

I had a wide variety of financial advisors among my family and friends, but only one piece of advice. Sell! Diversify! Now!

Example 1: "Apple is the fastest-growing company in history. Their stock is valued at more than five times earnings. There is no way that kind of multiple can be sustained!" (Many companies have been trading for years now at more than 30 times earnings. A few seem to continue to sell well with no earnings at all.)

Example 2: "Don't keep your eggs in one basket. Take the tax hit and diversify into nice, safe, traditional industries. This personal computer stuff is just not going to hold up." (No comment.)

My friends not only gave me such valuable nuggets of advice as these, they also referred me to their trusted financial advisors. These worthy "independents" turned out not to be so independent at all, carefully steering me away from Apple stock and toward certain financial instruments that would give them a healthy kickback, which leads me to principle number two...

Principle 2: The only way anyone other than you can make a single penny from your stock is to get you to sell it.

This is the most important principle of all. Memorize it. Repeat it to yourself. I recently had it tatooed backwards on my forehead just so I can see it in the mirror every morning.

I kept the fact of my new-found wealth a deep dark secret—for around two microseconds. Then, I told everyone I knew, including my banker, broker, and that guy I used to see on the bus.

My banker and my broker were most interested. My banker arranged lunch for me with an officer from Wells Fargo's Trust Department. They wanted to help me by liquidating all my Apple stock, paying the hefty taxes, then putting whatever was left into nice, safe, long-term investments that would return 4%, maybe even 5%, per year. (Less, of course, their fees.)

My broker appeared a lot more reasonable. All he wanted to do for me was to ensure that I made the most money possible on my Apple stock. So he would keep me informed about "word on the street." That way, I would be in a position to sell my Apple stock before it would drop, then buy it back just before it went back up. I went with his program. It seemed like a good idea at the time. More on this later.

Principle 3: $1000 is not pocket change

Picking up a million dollars in a single year can really warp your sense of proportion. If you are a venture capitalist or big-city politician and can expect to make that every year, that's OK, but when it is a one-shot deal, an attitude of riches can cause real problems.

It started out rather easily, with an $80 lunch here, a $200 dinner there—after all, I could eat thousands and thousands of such meals without ever running out of money. Then there was the new stereo for $1000. The new projection TV for $3000. The new hot tub for $4000. Before I knew it, the going price for casual purchases had hit $5000, and it still felt like the money would go on forever. Turns out, it doesn't.

Principle 4: A Chevrolet bought with $30/share stock costs more than a Ferrari bought with $300/share stock

My neuvo-riche car was a Delorean, stainless steel, gull-wing doors, and all. Just under $30,000. Fairly conservative next to the Rolls Royces and Ferraris that were in vogue around Apple, but today, that $30,000 would be worth more than $500,000, if I hadn't sold that stock. I understand you can buy a pretty nice car for $500,000.

Principle 5: Don't devour your chickens before they hatch

Shortly before we went public, I bought a house with the proceeds. Yes, before we went public. Nothing illegal about it. Folks knew I would be getting a lot of money after we went public, and folks just wanted to be my friend and extend me all kinds of credit. I wasn't pledging stock or nothin'. They were just happy to know me.

I bought a $300,000 house for $1000 down.

By the time the bill came due, six months after we went public, Apple stock was well under the IPO price. That $300,000 house cost me more than $9,000,000, had I held onto the stock.

Principle 6: Pick your broker carefully, preferably one made of silicon

Couldn't I have gotten loans for the house? Sure, but something else, something darker, was going on. My friendly stock broker was calling me once or twice a week at around 7:30 in the morning. Those who know me know I'm not at my best at 7:30 in the morning. So did my broker.

"One of the Apple VPs dumped 100,000 shares yesterday. There's apparent trouble in the company. It is time to sell."

" Our analysists say things are looking up. Time to buy."

And so on, and so on. None of this advice made any sense at all based on what I knew was going on at the company, but the stockbroker, after all, had the inside track and I didn't.

Notwithstanding the high quaility of his inside information, my money just seemed to slip away. By the time my friendly stockbroker was done "advising" me, my shares had virtually disappeared. When I realized I was in danger of losing everything, not knowing what else to do, I cashed in the balance (all but one share) and put it all into my house. At least I wanted to walk away with that.

My broker was engaging in a practice I now know is termed "churning," repeatedly getting a naive investor to buy and sell, buy and sell, collecting commissions all along the way. By the time the poor schnook figures out what's been going on, he's too broke to sue and the stock broker has moved onto the next "mark."

This was not Joe's Fly-By-Night brokerage house. It was one of the big, giant, old names, a "full-service" broker. And when I finally complained, they knew nothing. Why would one of their top sales people engage in such a shady practice? (A few years later, they pled guilty to charges of churning brought by several other clients.)

My broker this time around is a server somewhere in the bowels of Chas. Schwab & Co. Broker "advice" I can live without.

Principle 7: Avoid avoiding taxes

If you are lucky enough to receive valuable options, you will soon discover you have a particularly nasty silent partner. I'm speaking, of course, of Uncle Sam, who will be dipping his hands so far down into your pockets that he'll be able to untie your shoes.

My strategy at Apple was to screw this particular partner out of everything I could. It was a Pyrrhic victory. Uncle Sam didn't get as much as he otherwise would have, but I ended up losing more money than he did in the process. With the stock flying high in December, I would hold off selling, so I could throw the transaction in the next tax year. Inevitably, the stock would tank in January just when it was time to sell.

That was the easy way to lose money. The more complex way had to do with tax shelters. Even though these have pretty much gone the way of the Dodo bird, you still might receive a visit from some oily character wanting to get you into commercial real estate, offshore cargo containers, avacato trees, or oil.

Run! The best I ever did on one of these deals was to get 97% of my original investment back after they had sat on the money for nine years. And when I did get the money back, the government tax man showed up at my doorstep with a tax bill—for more money than I had originally invested.

Uncle Sam will get his one way or the other. Pay the devil his due—and not one penny more.

Principle 8: Buy low, sell high

Buying low and selling high is good. Unfortunately, when I went back and looked at the trades that had actually taken place, that wasn't what had happened at all. I had more often bought high and sold low.

With the broker's help, I was doing the most natural thing possible: I was buying on exhilaration and selling on despair. When the stock was going up, I desperately wanted to ride that train. When the stock plummeted, I wanted nothing more than to get off. Unfortunately, by the time you realize a stock is going up, it's up. And by the time you panic, the real drop has already taken place.

Over the last 50 years or so, mutual funds have returned around 16% per year. However, investors in those mutual funds have realized less 7% per year. Why? Because they buy on exhilaration and sell on despair over and over again.

As for me, don't feel too badly. That $300,000 house is now worth well over a million, and I had enough sense to marry an MD, so my income is really quite nice. And I also have those shares in my new company.

My new plan

My personal plan is to handle the new shares differently:

1. I will not be seeking advice from family and friends.
2. I will not be acquiring any "professional friends," in the form of stock brokers, bankers, or financial advisors.
3. I will not be obligating myself to spend money before I have it or before I am prepared to part with it.

What I will be doing, instead, is following a new twist on a very old principle:

Principle 9: Never touch the principle; live off the dividends

I learned this principle at my Father's knee, but it didn't translate well to Apple, because Apple didn't have any dividends. It was a "growth stock," with earnings expected to be pumped back into the company.

What my wife and I do plan to do with our new stock is to emulate the earnings pattern of traditional companies. Once we retire, we expect to liquidate 5% of our shares every year, with the hope and expectation that the value of the stock will rise more than that 5%, giving us a nice "raise" every year. This may or may not be a good plan, and it certainly isn't a plan for everyone, since not every company, in the long run, succeeds. (In other words, if you use it and it doesn't work, don't come complaining to me.) However, it would have worked extremely well for me in the case of Apple, and I suspect that we'll do all right with our new company. At least we won't be down to only one share a year from now.

Please, seek council where you need to and form plans that make sense for you. Just be aware that friends are not necessarily psychic, that rumors are just that, and that professionals you talk to may very well have their best interests in mind, not yours.

Reader Response:

How to have your cake and eat it, too

Having read "How I made a small fortune," and having gone through a similar period of my life, I thought I would offer a bit of advice.

I tell people that work is a nice way of making a living, but a lousy way to make money. The flipside of that is that you should use the income you have from work to live off of. In my case, I used my stock to leverage a mortgage that I could afford, but didn't use any of it to pay for my house. The stock that I didn't sell has appreciated enough to pay off the mortgage three or four times over, and the mortgage still inspires me to go out and do something with my life.

Bruce De Benedictis

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