Join my colleagues trish regan. I thank you. We will talk a lot about apple. Karo, you first, given the huge selloff we now underway stocks lunging almost 300 points right now, what do you think is really behind the selloff . I have said for the last year stocks might be a bit high and that there is a lot of risk. I do not think there is one specific thing. The International Situation is obviously pretty bad. Oil prices, of course, have fallen off a cliff. Have, profits in this country are somewhat questionable. Based on low Interest Rates. You had a harm a high market for a number of years. You have to expect these things. You could ask the other way, what caused the market to go up . 80, 90 . So you think this is the start of a correction . I do not know. It is like asking me if i think the farmers life will shoot another seven in vegas. There are too many variables. I just think, on a macro level, you can predict the trend, and that trend, shall we say, there is a lot of risk. A lot of risk comes from europe and obviously germany not looking so good with the data we have seen there. There are fears of inflation. Do you think we could do anything in the u. S. To shield ourselves if youre really in fact struggles . A lot of International Companies are in the s p. Exporting, it will be somewhat stale because of the dollar. You have a lot of companies that depend on it. Companies that are no there in some different currency. They report that and converted to dollars. Fromngs will be earned both sides. There are a lot of things. It does not mean is the end of the world. But everybody is so surprised, but, you know, it is almost sort of funny. You hear everybody start to get real bullish, would have which happened in the next month or two. You know that might be the end of it for a while. It has been quite a run. What do you think we can contribute to all of that as well . Easy money and the Federal Reserve has had Interest Rates and record lows for six years . Yes. I think that is a lot of it there you have these low rates that made it possible for these companies to borrow at three or 4 , especially the highyield market is in a bubble in my opinion. You have companies you would never have given money to. I think it was almost a nobrainer. It was obvious the highyield Interest Rates had to go up eventually. You have the credit spread. Level, when you look at it from the point of how it came about from the Federal Reserve lowing these rates. There are summative or things you could argue. Youre looking in Good Companies for all of this. Lets get to that letter. You reaffirm your approval of tim cook. It sounded a little bit like valentines day there to me with that letter. But, you know, your concern is that the stock price, in your view, is far less than what it should be valued at. You would like to see it at double what it is. Valuation is so much higher than the overall market . Why is there this is connect between what you see in the company and what investors see . I will say two words and then let brett speak. Brought appleve to us. I loved it after looking at it. That i think it is change that people do not realize in apple. Is a sea change in the greatest it is renowned the world. Mobile phone. In that apple is not a hardware manufacturer as people would like to have you think. Is really an ecosystem, a way of life, if you will. Every time they sell a phone, it is an annuity. This concerns certainly a better multiple in the s p rather than a worse one. Mean, that is really simple. I like to look at things simply. You ask about the market a look at a couple of things that are simple about the dollar. To me, you try to reduce the simplicity. Say,lot of people would this company is so product depended. If it does not come out with something that really wows everyone, that puts it in jeopardy and that is why it trades at a discount. We expect the new ipad out next week. With that change anything for the company . In combination with the iphone and the other new platforms the company came out with such as payments, health, home. I think with some are beginning to understand and some do not is this company is, as my father put it, it is not just a hardware company. Has a whole ecosystem of routes designed by really talented people over at apple to Work Together to, you know, change the way that people interact with all their apple and mobile devices. And how they share information and asia between them that continues to improve and gain traction, there is a growing need between apple and the competition. I think that is where we get very excited about seeing the iphone 6 take a lot of share. From the competition. Because of not just the hardware piece of it itself and dominant product, but the whole ecosystem starting to really come together and gel and make a difference for all the users. Click yes. One of the concerns is that apple is expensive and it has been challenged in emerging markets because of that because he broken by an Android Phone for so much cheaper. How does it capture the big emerging market share . You are bringing up a good point, that apple is a premium brand. They will not compete in low and junk. For phones below 400, apple will not compete there or come out with a product. The premium market, even in those emergingmarket companies, is going rapidly for apple, especially, we are excited to see the chinese rollout, which on october 17, now that theyre rolling out four g networks in the company. We think that will be a big opportunity for apple to shine. What we see is that the existing iphone customers are similar to annuity in that at the end of two years when a contract comes up, pretty much, most of them renew and now that apple has a larger screen iphone, samsung going for the same price, we expect them to take a lot of share. Ourcannot even get it to offices here. Getting even bigger, you have got to wonder at what point these two markets start to merge. You get the iphone 6 plus and in the many ipad. Might they cannibalize each other . Mini, there could be cannibalization. At the same time, there are rumors and we expect apple to introduce a larger screen ipad, which will help support average. Rices as tim cook alluded to, they are now going after enterprise with ibm, where they are low penetration today. When you look at the size of his missed that apple is doing today, with the ipads, the enterprise and innovation, they will be able to read night growth in the category. A big mistake everyone is making here is, for instance, the watch previously, until apple said they would do a lot, none of the analysts wanted to include a forecast for the watching their numbers. If you look at apple over history, that would be a very a very ignorant thing to do to say, before recover out of an iphone, apple will not include cell phone, or they will not do and ipad in the numbers. To look at the Company Given the history and the premium brand they have and account for that in your forecast earnings, which is, how do you value your company . Is obviously different than what we see a lot of annulus analysts doing now. Talking money are they about doing . They have artie got 30 billion. You consider that a success. Much more question mark how much more . Think the company is so cheap, i spoke to tim cook. I sent a letter. Spoke to him the other night. He believes it is very undervalued, just as i do. I mentioned the buyback obviously, he could not anything, noncommittal. Think they will do a major buyback. That is my guess. Is it makes sense. Company is really on a new paradigm. You think i have to keep introducing. I do not think it is factual that i have to keep doing that. One day come you own a buick. The next day, you buy a cadillac. Annuity wherean you own an ecosystem. The ipad, but also the watch in the iphone 6, and you have all your collection of photographs and music on it. You do not go away from that when you are used to it and really involved in it. But you do go away and you do get market share as well from samsung. Isnt it on the same level . Samsung, they are making the hardware and google is making the software. It is a big difference when you have one company doing the whole thing. Analogy, i am not a big racing fan, but i love to look at the winners. Out i was younger, i went to that and it ran away with the race. I think that is what apple is doing. So this is a way of life. Lets break this down. You are talking about potentially 100 billion. How would you structure Something Like that . I would love them to call me but i doubt they will. I think we proved, as we say in the letter, that we are strong in this area. They have a 31 annualized , you know, over the last four years. I know. Hits like netflix. It is 36, actually. Im sorry. [laughter] they have got a lot of cash overseas. If they brought it back, they would get hit with taxes. Hold up. First of all, they can bring easilyme, but you so could go and have a lot of cashier. Secondly, they could go borrow money at 3. 5 . Have have to be a genius if you fit the company will double by 100 points, you know, you could go borrow three. I think theyre happy they did this and i like to feel that we were an influence on upping the buyback. Right now is a perfect time. There is another little area here, which we see probably more than others. We think a lot of bonds compete with index bonds, so you have a lot of other funds around, which is a lot different. They get paid one and a quarter 33 . Nt as opposed to in other words,. 33 and an index fund. Meaning, they have to outperform the index is. What the funds is due do is overweight or underweight on different stocks. This is an interesting theory. How does that affect apples stock price . Are you saying Fund Managers are not as incentivize . No. Let me say it and then you will get it. Fund,m saying is if your you want to do better than the indexes, and not worse. If you are underweight, meaning, you have less apple than the index fund does as a percentage of your fund, that will lay down on your return to your investor. If you look like youre making less than the indexes, less than the s p, people will sell your fun and that is what has been going on. So it used to be, you love whatever. You just kept it. You do not keep it. So you say, why should i pay 1 or one and a quarter percent of my money to the fun when i could buy the index fund and only pay. 33 . We think right now, you will have a short squeeze taking place. A lot of these Fund Managers did not like apple, using what youre saying, they used that logic. It is a hardware company, a variable margin will narrow. And therefore, it is really not that good. Now, suddenly, they will realize, we think, that what we say is correct. I think they are realizing it and therefore, apple will gain market share. And earnings will increase at the ratios. They better hurry up and buy that stock. Think it is sort of taking place a little bit now and will continue to take waste. , that we think the stock is very cheap. You mentioned borrowing money. It seems like what we were talking about as we began this discussion. What you say to critics . I do not think it is Financial Engineering to say, if a company was sitting with 133 billion dollars in cash to borrow against that cash, so to speak, and by something they think is 100 cheaper than it should be, i think that is just common sense. Call it what you want. People just say Financial Engineering and i think most people do not know what that means. You know how to restructure companies and dubai box do i fax do buy backs. Why is that . I was laughing a little bit. I think tim respect me and i think youd call to say, what do you think . I think he would. But i think apple and the board will not say, carl, why dont you come to a meeting and give us your advice. Think io not think we intentionally did not want to make it about a specific number or a specific structure. Then we figured more of the publiclyuld be, both and potentially with the company, would end up being about this or that specific way to do it. They know their Balance Sheet english intricacies. There may be more efficient ways to use the cash overseas to do buyback without having to borrow they seem to think they definitely could have structures like that. It is really more up to them to spend the time to figure out how to source the funds for the buyback and decide how big the buyback should be. Given the massive disconnect in takingon, they should be a serious look at how to do more faster. I would like to say one thing. Conclusion,e to a logic. You take certain facts. It is a fact that tim thinks this thing is undervalued. Stock in by undervalued company, you do a great thing for shareholders. Those are the facts. We hope they do it. I want to make clear, this is not based on that and we think this company is going up anyway, whether they do it or not. I know. There are a lot of reasons you like this and you outline it in your letter raised on apple, is he receptive to you . And talk tohim him him . Ago spoke to him two nights. Were both busy and he is very busy. It is not like we talk every we are oldike drinking buddies, but i think he respects me and i greatly respect him. Really do not feel i should go into anything he says. I want to put that out. I want to take that out of the equation. But he listens to you and you have conversations. Absolutely. Very good relationship. He obvious he cannot tell me things he can tell other shareholders, but we have good conversations. Yes, i think he is a great listener. And look here and i just, you many i have criticized ceos is and i criticize many boards and i do believe one of the problems of this country is the system is dysfunctional. But you also have very good ceos is and he is one of them. I am happy to say that. I do not know the people on the board but i think they acted responsibly in keeping him. There was pressure and criticism. We cannot and said, we really like the guy. I think they acted responsibly here. They acted responsibly because, i think, they do not micromanage like i do not micromanage a company. You have made a career out of going after them. Way withgetting your ebay and paypal. Mark is on the board there and he has had pretty negative things to say about you recently. There has been name calling. What is your response to the swing first and ask questions later . If you really want to get me going. He is the quintessential guy that is much more corporate america. I put them on last time when i heard he said something about me. It is hard to hear him, because he talks about it with a squeaky voice and only a dog can understand exactly what he says. The gist of what he is saying. You know, i guess he has made some points. Outrage, certain things. Corny,risk of sounding one of the things that really upsets and outrages me is guys like this. They get on their high horse and they are arrogant. He called you evil. What is your superlative for him . I do not care what he called me. I will not go dignify a bunch of ranting he did on a tv show. If you let to say, me just come if youre asking me my opinion of him, hes the kind of guy i get outraged at because he preaches a duty. He is given a duty and he reaches to the sky. Bought thatand stock any new microsoft wanted it. He paid the equivalent of 1 8, he has a fun there. Not his fund. They sold for 8 billion. That money belongs to the shareholders. I called him out on it and i am not afraid to. He would counter you and he would say, i took myself from the situation i did not go near that. He did not involve me in any way. I did not make all this money being born do you really believe that . If you believe it, great. I respect you a great deal. You are a commentator here. But i do not believe it. I know what it means to be recused on a board. He influenced that board. He did it. We had a nondisparagement agreement and we both signed it. He chose yesterday to breach the agreement, which he does. He preaches agreements. He chose to breach it by saying all this stuff about me. I feel free to say this stuff about him. In a way, i think he is really mad at me because i was a force to help get the company split. You know what, i do not believe he wanted it split. I think he was planning to buy skype. Cheaply, as he did i feel good about that because he probably knows a couple of guys want to buy paypal like he knew guys wanted to buy i will say it again. More people than casanova. That is all i will say. I will say more if you want to ask you more about it. Should bethink he kicked off the ebay board . Absolutely. He should not be on it. You know, he should not be on that board. It is a sin he is on that port, in my opinion. We agreed not to disparage. I signed it and i lived by it. He violated it. And now i am free. I really feel good about that. I am sure he will hear from you again and im sure i will hear from him. E will say more hateful stuff but, you know i am not the kind of guy who keeps quiet. You have gotten into a few fights. But are you looking at mark now as symbolizing your frustration with Silicon Valley . Im not really frustrated with Silicon Valley. You have got other really good guys there. But there are real bad guys. There are a bunch of bad guys. All over corporate america. I am sure a lot of them, i have gone after a lot of them here at i am sure they unanimously hate me. Borrow what roosevelt said in one of his great speeches, i am sure they all hate me and i welcome the hatred. But, you know, it is not that he personally gets me mad. It is the system. If you get me going on that, i could talk for five hours. Has reported he recused himself. Chris and i will say again, first of all, he influenced and went and bought that stock, and he knew microsoft wanted it, and yet he bought it on the cheap. He literally stole it. So you know, as far as i am absolutely not is excuse. I think it should really be looked into. We sort of made a deal we would not do that at this point. But you know, he can argue and say, maybe it is, coming out and doing all this and being but millions of shareholders across america with the stocks i bought. It is certainly an enhanced value for all of them. I will stay doing it as long as i can. And the gloves are off. Lets talk a little m a. Can you envision a situation where apple might buy netflix, a company that come i believe you guys still have a stake in . Yes. The substantial majority of our position in the portfolio we manage, including derivative. Is, as ivelix always thought, a highly Strategic Asset for many of the big players. However, the companys standalone process remained so bright that i think it would be for ardinarily difficult larger guide