My portfolio in general is stable, but my performance is lagging the general market by a significant amount in 2013 because I am overweight in Apple Inc. (NASDAQ:AAPL). I got overexcited in the short-term and did not see that the company was rapidly evolving, possibly for the worse. In order to analyze my own mistakes over the past few months, let me get back to basics and define some core principles of investing that I usually adhere to. These principles usually have protected me from doing stupid things and in general are good ways to hedge your bets and avoid big losses.
Back to basics
1. Diversify between asset classes, especially ones that don’t run together.
Diversifying between domestic equities (small and large caps), international stocks (Europe, Japan, emerging markets), REITs, bonds (short and long term) and other asset classes can provide some protection from concentrating on one sector (mobile or PC makers, in this case).
2. Dollar cost average into positions.
Decide on an amount of money to invest over the year and invest every month. This is easier to do with mutual funds, but you can do this with individual stocks easily as well. In this case as Apple shares find a bottom you end up buying more shares as the price is lower, and fewer as the price rises. Seeing as the next year or two will be critical to Apple Inc. (NASDAQ:AAPL) in terms of its product cycle, this would make sense if you believe, like me, that some new products will goose up the stock price.
3. Options are highly flammable, use with extreme caution.
The time expiration of options kills you if you are wrong about the timing of stock moves. In my case I was betting on one big event and should have hedged that bet by buying puts or not making the bet at all, since my March contract expired worthless.
4. Look at some basic technical indicators in the chart, particularly if you are investing for anything less than the long haul. Proceed with caution if the trend is against you.
The crossing of the 200 day moving average with that of the 50 day moving average is frequently cited as a quick and dirty indication of the technical trends. To me, it is a caution flag. In this case, there was a lot of bad news coming out in terms of decreased demand for Apple Inc. (NASDAQ:AAPL) iPhones and iPads, and the stock price reflects the nervousness of big investors.
5. If you think you are right and the evidence or valuation is in your favor, hang on if the premise for buying remains intact. If your premise for buying breaks down, then you need to sell. Sell if the business has fundamentally changed and no longer fits your plan.
Valuations
All of these principles apply to what has happened to the stock price of Apple. Apple Inc. (NASDAQ:AAPL) is currently sitting near a 52-week low, and is selling at a valuation level that to me screams buy. But the best approach to those wishing to wade in cautiously is to dollar cost average and spread the investment over a longer time frame — possibly a year or two.
Apple is being compared to Microsoft Corporation (NASDAQ:MSFT), but looking at the valuations, Apple is currently selling for a PE of less than 9 and Microsoft is currently at a PE of greater than 15. Are Microsoft’s products more popular or superior to Apple’s products? Some might argue yes, but I say that Apple has held its own against Samsung and Google Inc (NASDAQ:GOOG), which are the most immediate threats in the mobile space.
