All Good Things Come to and End – Apple Implosion Reality Check

by Darwin on November 15, 2012

No, I’m not giving up blogging! LOL; I’m talking about investing euphoria.  Namely, Apple.  Apple had grown to become the largest publicly traded stock in the world and a true household name over just the past few years.  They’ve launched world-changing devices with huge profit margins and had the share price performance to prove it.  However, what I’m seeing now is the same cycle I’ve seen repeated over, and over, and over, again.  All market out-performance (alpha) eventually comes to an end.  And that end often ends badly as the once euphoric investors head for the exits, finally realizing that the party is over.  This is the way it always has been, and always will be.

Emotionally Attached to Stocks

Warren Buffett’s “buy what you know” mentality is a double-edged sword.  Routine mom and pop and young investors who haven’t been burnt before get wrapped up and emotionally invested in companies they love (or think they love).  We saw this with Facebook, Groupon, even the gold euphoria and of course, Apple.  Here’s how it goes.  You’re an Apple fanboy.  You know that Apple has a very small market share of laptops/OS and has tons of room to grow.  They launched the iPod, iPhone, iPad and who knows, maybe an Apple TV that people will actually buy?  You know something everyone else doesn’t.  They just “Don’t Get It”!  They don’t get how good Apple products are and they will eventually come around and buy in droves.  Not to mention, there’s an enormous ex-US market out there.  As people shift into the middle class everywhere from China to Brazil, they’ll be buying these Apple products as well.  It really seems like the opportunities are infinite, as should be the share price appreciation.

For a few years, that’s how the stock actually performed. Not too shabby.  This is showing Apple up over 700% versus the Nasdaq a bit more than doubling since the market lows in March.  This was leading up to just the past several weeks.  Then…

Here’s the problem.  The smart money already accounted for all that.  Sure, maybe Apple continued to surprise to the upside for a while and analysts didn’t quite account for the extra million units in this quarter or that quarter, but for the most part, all this brilliant success that you’ve imagined in your head is already baked in to the price.  Once this realization hit the market and people started running for the exits, Apple is now underperforming the NASDAQ by a margin of more than 2:1.  The seemingly impossible has happened.  The honeymoon is over.

 

This will happen with countless other “hot” stocks and companies over the years.  The sooner you recognize this trend, this notion of an investment becoming a religion, you’ll be better insulated from becoming indoctrinated.

At the end of the day, the vast majority of investors are probably better off not investing in individual stocks anyway.  Focusing on ETFs or mutual funds with low fees is much more likely to beat an actively managed stock trading portfolio.  But if you must… remember that all good things come to an end.  Keep reasonably sized positions, sell some along the way when you have a really hot stock, hedge where you can, and above all, realize that no stock is invincible.

Disclosure: I’m still long Apple, I must admit.  I bought 100 shares in 2008 and have sold about 10 at a time every few months, pocketing some pretty nice gains along the way, but still holding 10 shares I wish I sold a month ago!

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{ 3 comments… read them below or add one }

1 Kentucky Packrat November 16, 2012 at 10:41 am

Apple is a strange beast. It’s just about the only computer company making a profit at selling its product. Google and Samsung are making more money from Apple products than from the products they’re selling in competition with Apple.

However, Apple was priced for astronomical growth until the end of time, and we all know that couldn’t last. It’s falling now because people are seeing the truth: Apple (at least until the next innovation) is now a company with a huge marketshare (and huge profit margin) in a (at least temporarily) stable market. They are facing the potential of either cutting margin or sacrificing share when the next growth burst occurs.

Long term, I would MUCH rather hold a block of Apple than of Dell or HP. Dell is a financing company pushing computers, and HP can’t find its rear end with three maps and a guide dog. I’m just not sure that I want to hold Apple at today’s value today, but I SURE don’t want to hold Dell or HP shares for anything more than their value as toilet tissue.

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2 AverageJoe November 29, 2012 at 9:48 am

This is a stock I actually was pretty smart about (I’ve had some losers, like everyone….shocker) BUT I loved Apple enough to purchase some and knew the reason I liked it: Steve Jobs.

When Steve Jobs died I realized that the gig was probably up. Based on the extensive reading I’d done, it was his devotion to style over features that was winning the day. After he passed away, it seems the techies are winning out (rarely a good thing): Apple products now “do” more than ever…but who cares?

I like your mention of “buy what you know” and how it’s a double edged sword. While most people have heard this Lynch truism, they never follow it past step one. Step two is to use the fact that you know a little to dig deeper. It’s important to know why you like it and why others would as well.

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3 Andrew March 10, 2014 at 8:08 pm

I have found that Apple has gotten too big for it’s investment base. I am moving on and looking to alternative technology investments for the future.

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