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.

What is an investor to do?

The world is full of uncertainty. The US economy is struggling; not growing much, but not declining either. Job growth has been slow, but steady, particularly in the private sector. The European Union continues to face more significant challenges.

Interest rates are at all-times lows. The 10 year US Treasury bill yield has ranged from 1.45-1.60% recently, which is actually a negative "real" return. This means that after inflation and taxes, the net return is negative.

What is an investor to do?  

 

Many prominent stock and bond market "gurus" are decrying stocks, with comments similar to the "death of equities." Bill Gross, one of the world's largest bond fund managers, in his August, 2012 Investment Outlook, started his essay stating "the cult of equity is dying."

A few days ago, one of the largest hedge fund managers in the world, Louis Bacon, announced that he would be returning $2 billion to his investors (for which he was charging 3% annually, plus a 25% performance fee), citing his underperformance and inability to cope with worldwide market conditions.

There have been huge stock market redemptions from mutual funds over the past few years. Per Morningstar, since the beginning of 2009, investors have redeemed $200 billion from US stock market funds. During the same period, $700 billion has been added to bond funds. Usually, mass inflows or outflows of mutual funds tend to be leading indicators.....of the opposite direction of the markets.

These are all signs of stock market pessimism, which are actually positive, for long term investors.

We view the current environment as a long term opportunity, for many reasons. For our current clients, we have developed investment plans and are adhering to them. We do not think it would be advisable to react to current economic issues by making major, sudden portfolio changes. We agree with the philosophy of Warren Buffett, when he wrote that "we attempt to be fearful when others are greedy and greedy only when others are fearful." He is frequently a contrarian, and has been very successful doing so. As the stock market redemptions reflect, this has been a period when many others are fearful of stocks.

We work with our clients so they avoid making major financial mistakes, so they are better able to meet their financial and personal goals. We advocate broad, global diversification.

• US markets and many global stock markets are positive for 2012, though many people would not think so, based on media reports.
• We have avoided the huge losses that many have incurred by not buying IPO's in stocks such as Facebook or Groupon (including some very wealthy and prominent individuals and some of the largest stock market mutual funds).
• We have taken advantage of certain market volatilities, by rebalancing and tax loss selling many times already this year (and not just waiting to do this at year-end).

While we cannot predict how worldwide stock markets will perform, we know that we are providing advice for our clients that are in their best interests. We rely on academic and historical research, not unproven forecasts, or crystal balls, for our investing strategies and how we structure portfolios. We are confident that these strategies will continue to be successful over the long term.