How Did You Handle Apple Stock? Our View.

I love my iPhone. I love my iPad. But loving Apple’s products and loving it’s stock are two very different things.

After a phenomenal period of rapid rise over many years, Apple’s stock has taken quite a tumble, from its all-time high of $705 in mid-September, 2012, to its closing price of approximately $450 per share on January 24, 2013. That is a decline of $255 per share, or 36%.

The decline in Apple’s stock is a reminder of some important investing lessons:

• Discipline is required in buying and selling
• The lack of value of Wall Street “analysts”
• There is a better way

Discipline in buying and selling:

It takes great discipline to sell a stock like Apple, which has terrific business prospects and success. Why sell when it had only continued to go higher? What will the top be? Won’t it just keep going higher, as more phones and iPads continue to be sold? Unfortunately, as with many other high growth companies in the past, the growth eventually slows, margins begin to decline, and the stock tumbles very quickly.

It is difficult to be accurate twice, identifying both the right time to buy and the right time to sell individual stocks. It is even harder to be able to do it on a consistent basis over a long period of time, which has led us to some of our core stock investment philosophies.

For the majority of your investment portfolio, we do not recommend purchasing individual stocks, as it is too hard to consistently predict the right time to buy a stock and the right time to sell that stock. For an Apple shareholder who purchased shares years ago, they should still have significant profits. However, there are many others who may have purchased the stock above the current $450 price or even worse, those who had huge gains, but did not sell some of their shares as the stock seemingly rose unabated, towards $700.

The lack of value of Wall Street Analysts:

We do not feel Wall Street analysts add value. Observing the two days surrounding Apple’s most recent earnings release very clearly re-enforces this.

Wall Street analysts provide advice to retail clients of their brokerage firms, as well as to mutual fund and hedge fund managers, who pay for their advice. If Wall Street analysts were providing real value, you would think they should have recommended selling Apple stock sometime prior to the earnings release on January 24, 2013. During this period of time, the stock had fallen from $705 to $500.

Before the earnings release, Apple stock closed on Wednesday afternoon at around $500 per share. The stock opened the next day at $460 and closed at $450. This shows clear evidence of the difficulty of predicting a company’s earnings and its stock direction, as well as the analysts’ reluctance to recommend selling a popular stock, such as Apple. If it is their full time job to track the company, shouldn’t most analysts have anticipated the earnings report correctly and recommended selling the stock at some point in the last 6 months or at least recommended to stop buying more shares?

However, before the market opened the day after the earnings release, 25 Wall Street analysts had issued new opinions (“refreshed their calls”). What did they say? Twenty one (21) of them still had buy, overweight or outperform ratings on the stock. Four analysts had neutral or hold ratings. None recommended selling the stock.

It is also important to note that it is impossible to “beat the market” once new information is released, as the price dropped $40 per share immediately at the open after the new data (the quarterly earnings report) was made public.

The impact to you: there is a better way

For most investors who desire a long-term, positive investment experience, we recommend a different approach.

• We structure a globally diversified set of mutual funds for our clients, and provide the discipline to monitor and rebalance these funds to remain in accordance with your personal asset allocation target.
• This removes the guesswork of when to buy or sell an individual stock, or how to select the next hot money manager or mutual fund.

This example of Apple stock, with its tremendous growth as a company and of the stock, followed by the recent huge stock price decline, is very representative of many “growth stocks.” Based on many years of academic research, this has led us to favor “value” stocks (stocks that are out of favor and not “loved” by Wall Street).

• Value stocks have outperformed growth stocks over the long term, and we structure our clients’ portfolios with this in mind.

Our approach has more aspects to it, such as tax-efficient investing, broad diversification and very low costs. But most importantly, we strive to provide our clients a greater sense of security and comfort through our approach to investing. Without the guesswork.

Guidance on New 2013 Tax Law

The following are highlights of the major provisions of the “American Taxpayer Relief Act,” which was negotiated and passed over the past few days (and nights!).

While the top federal income tax rates will increase only for those earning greater than $400-450,000, there are other measures that were previously enacted as part of the Health Care reform legislation that will cause nearly all working taxpayers to pay more Social Security taxes effective January 1, 2013.

Tax rates:

• Tax rates remain the same, except for taxable incomes above $450,000 for married taxpayers and $400,000 for single filers. A new top rate for taxable income above these levels is raised from the current 35% to 39.6%.
• Note that someone’s income can be well above $450,000 before the 39.6% rate is effective, as that rate is after itemized deductions, such as mortgage interest and charitable contributions. 
• For those with taxable incomes of less than $400-450,000, there will be no increase of current federal income tax rates.  
• As part of the health care reform passed in 2010, an additional Medicare tax of 3.8% will apply to unearned income (investment income, such as interest and dividends; capital gains and rental income), for married couples with income above $250,000 and single taxpayers above $200,000. This is already law, and is not part of the recent legislation.
• Also as part of the 2010 health care legislation, income from self-employment and wages will be subject to an additional FICA tax of 0.9% (employee portion only). This applies to the combined compensation of married couples in excess of $250,000 and single individuals in excess of $200,000.

Payroll Tax Cut not extended: There was NOT an extension of the Social Security payroll tax cut. This represents a tax increase for all workers as of January 1, 2013, from 4.2% to 6.2%.


Capital Gains and Dividend Tax Rates:

The capital gains and dividend income rate will increase from the current 15% to 20% (plus the above 3.8% tax rate increase from the health care reform act), only for taxpayers with incomes that fall into the 39.6% rate (as stated above). For married taxpayers, if your taxable income is less than $450,000, then the capital gains and dividend rates will remain at 15%.

AMT (Alternative Minimum Tax): The legislation provides a permanent fix by enacting AMT indexing for inflation. This has been an issue for years, and has frequently been temporarily extended. This provides needed clarity and corrects a measure that Congress usually fixed anyway.

Itemized Deductions and Personal Deductions:

There will be a phase out of these benefits, for incomes above $250,000 - $300,000, which is an indirect tax increase.

Estate taxes: The estate and gift tax exclusions were retained at $5 million, indexed for inflation. The top tax rate increases from 35% to 40%, effective January 1, 2013. This is a significant compromise by both sides, as it permanently (at least for now) increases the exemption amount, so most estates will not be affected by the estate tax, in exchange for a rate increase on those who are impacted. The portability “election” provision, which allows an unused exemption amount to be used by the surviving spouse, was made permanent.

Other items:

• Tax credits were extended for 5 years, such as college tuition, child and dependent care and the child credit.  
• Tax free distributions will be permitted for 2013 from IRAs to charitable organizations (one year extension, not permanent).

Impact on Investment Strategy: The increased tax rates on top income levels, in addition to the Medicare tax of 3.8% on investment income (such as capital gains), makes our firm’s investment strategy, which is very tax efficient, even more valuable.

If you would like to discuss any of these matters further, please contact our office.

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