I tend to be a contrarian buy and hold investor. To illustrate this, let me tell you a recent story about an interaction I had with another investor with a different philosophy. I have a friend who is conservative and keeps his excess profits in “safe” instruments like money market funds. He invests mostly in real estate, and his set rules are to sell when the investment goes down 10% to prevent further losses and sell when the investment goes up more than 20% to protect the profits.
We were eating lunch together last year and I mentioned how I thought Apple Inc. (NASDAQ:AAPL) was going to be higher than it was six months later. Of course we all know that I got to eat my words, but I thought that maybe this wasn’t such a bad thing.
At the time, I had put about 20% of my portfolio into Apple shares. I also bought calls with March and June strike dates using about 1% of my portfolio. Given Apple Inc. (NASDAQ:AAPL)’s chart 2013 has been very cruel to me. Was I Foolish or simply foolish?
I’m good at seeing trends, but terrible at timing them. I got burned by using options contracts and should have hedged my bets by buying puts, but I’m a newbie to that game and prefer to learn lessons the hard way. Why am I celebrating then?
The difference between my friend and me is time horizon. I am in my mid-40s, with 20-25 years of earning potential in front of me. I can afford to lose 10-20% or even 30% of my portfolio because my time horizon is very long.
My friend is in his early 60s. He needs to be more conservative with his money since he will be needing it soon. He is doing very well by getting an average of 9-10% returns. I didn’t mention his buy rules, but typically he invests in private real estate deals.
I tend to invest in more liquid investments such as exchange traded funds (ETFs) and publicly traded stocks. I buy and hold as a rule, but my sell rules are more flexible. I really don’t have the sell discipline he has.
Going back to Apple Inc. (NASDAQ:AAPL), Mr. Market is shunning Apple. This has happened to the company before. In 1997, I took a leap of faith and invested when the company was selling for cash at hand. I was richly rewarded for that investment, but are things different now that Steve Jobs has died? I have no special knowledge of the inner workings of Apple, but I do trust Tim Cook. The hope is that he is competent enough to lead his team to build great new products.
When Google (NASDAQ:GOOG) was selling at about $500-$600 a share I took a good look and decided to invest in the company. I had looked with envy as others had ridden it up since the time of its initial public offering (IPO). The founders of the companies are true geniuses and may have replicated something that Apple used to have. That is certainly what many are betting now as the stock price flirts with new highs. Google is certainly beating Apple Inc. (NASDAQ:AAPL) in the hearts and minds of investors, but when the pendulum swings it tends to swing fast. If I don’t stay invested I tend to miss big moves to the upside.
Knowing your strength and weaknesses as an investor can help you decide on a style. I’m willing to take on more risk and volatility for that elusive home run. My method is tax efficient, meaning that I rarely sell and thus avoid capital gains taxes. My trading costs are low, with much less friction in my portfolio. My friend gets security, but has to pay higher taxes. I get volatility, but if I bet correctly my cost basis eventually falls into the single digits for stocks selling in the triple digits.
I don’t know which company will prevail in the next 10-20 years, but I want to remain invested in both Apple and Google going forward. Apple Inc. (NASDAQ:AAPL) is a value play with growth potential and Google has current momentum with the potential to rule the known universe.
Which method do you think is better? Do you have your own philosophy that contrasts with what I wrote above? Please let me know in the comments section below.
The article Why I Celebrate when Apple Falls Below $400 originally appeared on Fool.com and is written by Erick Santos.
Erick Santos, M.D., Ph.D. owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Erick is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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