Guest post by Brian Nichols, author of Taking Charge with Value Investing.
How Should You Invest in Apple?
The million dollar question is, “How Do I Invest in Apple?” If you know the answer, then you can make a lot of money in this unprecedentedly undervalued company. But unfortunately, no one truly knows the answer to this question. This is a stock that is trading without any reason or logic. It’s a fast-growing large cap stock that any true value investor would tell you is a great buy. Therefore, I don’t think there is a question as to whether or not it’s a good buy, but rather how to maximize profits, and relieve your nerves when investing in Apple, is a different story.
Spread the Investment for Peace of Mind
If you’re like 95% of the large investment firms in the country, then you have lost significant money in Apple over the last four months; due to it being a large position in your portfolio. And let’s face it, you probably can’t take another large loss. Therefore, why not spread your investment? Seriously, is there a reason that you have to be either “all-in” or “all-out” Apple? The biggest problem that investors are making is trying to regain their losses; as we naturally revert to desperate emotional based decisions to regain our investment losses.
My suggestion is to buy the stock over a period of time rather than all-at-once. My Apple buyback strategy is to invest 80 shares total in Apple over a course of eight weeks. I have already purchased 20 shares, 10 shares at $500 and another 10 shares at $448; therefore I am still trading with a loss. But, over the course of six weeks I will continue to acquire 10 shares per week which should allow for a stock that is fundamentally cheap to find a balanced trading ground. Then, I feel more confident in my position, but if I would have bought all-in at $500 then I might have sold or panicked when it fell after earnings. But instead, I feel no sense of urgency and have confidence in my position due to still being able to acquire shares in the future at a cheaper price.
Why Split Up the Purchase?
When the stock market is rising, or when we are making money, the same neurochemicals that are released in the brain of a drug addict are released in that of an investor (2011 Journal of Financial and Quantitative Analysis). Therefore, we repeat the behavior over-and-over because of previous encounters of success (not realizing just as many failures); so when we see Apple rising by 2% we try to jump in and capitalize on the trend. But when it starts to fall by 2%, the feeling of loss, that we have already experienced, starts to kick in, leading to desperate actions.
The decision to split up your investment works in several ways: A) it limits the size of your risk, B) it allows you to buy at the best price, and C) it allows you to stomach the losses if they do occur. If I was to buy 80 shares of Apple right now and it fell to $375, I would be tempted to sell even though I still believe that the stock is fundamentally undervalued at $460. Yet those previous periods of loss combined with the large position, and the fact that the market is trading higher, makes it almost impossible to hold throughout the volatility. However, when you purchase in small amounts it doesn’t matter what happens short term because you’re not fully invested. As a result, you begin to look at the investment in a different way: If it trades lower you know that you’ve lost some but that you have more shares to buy at a cheaper price, and if it rises then you know that some gains are already locked it and that you didn’t “miss out”.
When dealing with stocks that have lost great value in a short period of time, a buying strategy such as this is necessary to avoid mental pitfalls and emotional decisions that end up costing you even more money.