The Story of Private Capital Management and How Money Flows Through The Stock Market Daily

Stefan Cheplick
Apr 23, 2018 · 3 min read

In 2004, a hedge fund called Private Capital Management made a massive bet. They found a company they liked, and they decided to invest most of their portfolio in it. They had never made a bet this big.

Private Capital Management bought a little more than 20 million shares of a small, but growing tech company at the time. They paid, on average, about $12 for each share. That amount translated to a single investment of $240 million. In 2004, Amazon still did most of its business solely through book sales. In 2004, Nokia was still one of the best phones on the market, and you were probably playing Snake.

For Private Capital Management, the bet was on. They now owned 5% of a tech company they had researched for months. I am sure their entire team was studying it, trying to figure out why everyone was passing on the opportunity. The 5% position they took was larger than the founder’s stake. Who the heck was the founder? Did he not trust the company like Private Capital Management?

The founder was Steve Jobs, and the company was Apple.

Private Capital Management had clearly struck gold. Of course, that’s only in hindsight. The markets make hindsight too easy. You can only make a calculated bet on what you think will happen, and what you will do when things go right or wrong. That’s it. At the time, no one had ever heard the word “iPhone.”

Private Capital Management eventually sold their entire Apple stake. They held for a few years, and sold at about $45 per share. They made 275% on their investment. It was an incredible trade, and thesis. Here’s how the biggest Apple shareholders looked at the time, and just how much Private Capital Management owned vs. everyone else:

Now let’s pretend, for a second, that Private Capital held onto their position. How much would they have today? Their holdings would now be worth about $42 billion. To put that into perspective, this same fund has a total of $1 billion to invest today. But you can always tell a rookie investor from a pro investor based on how they treat hindsight. If you look hard enough, there are would-have and could-have moments everywhere. Private Capital Management had absolutely no way of knowing what Apple would become. That’s part of the game in investing.

Hindsight happens everyday. It’s been around since 2004 when Private Capital sold their Apple stake, and it was happening long before then, too. For markets, hindsight is an illustration of how much money, and opportunity is flowing through markets at any given time.

That’s why I like telling this story. It’s a reminder of the decisions being made everyday. Ones that they may love or regret years after. Money comes and goes on a daily basis through funds, both active and passive. It’s a reminder that there’s always someone else on the other side of your trade. And it’s a reminder that everyone has an investing story to tell about how they almost made their best bet ever.

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Luchini In The Air

Lessons about investing, and money management for the year 3030. By @Scheplick.

Stefan Cheplick

Written by

I write about investing and manage my own account. I look for misunderstood companies that can be big long-term winners. Working for @StockTwits last 6+ years.

Luchini In The Air

Lessons about investing, and money management for the year 3030. By @Scheplick.