In his classic investment book Security Analysis, Benjamin Graham said in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (its true value will in the long run be reflected in its stock price). Of course the same applies to individual stocks also.
Graham distinguished between the passive and the active investor. The passive investor, often referred to as a defensive investor, invests cautiously, looks for value stocks, and buys for the long term. The active investor, on the other hand, is one who has more time, interest, and possibly more specialized knowledge to seek out exceptional buys in the market.
Active investors have many advantages. To begin with, the fact that active investors investigate more stocks, means they have more choices. Another advantage is that active investors gain experience over time with market psychology. Also, more importantly, active investors over time can buy and sell stocks with less psychological distractions and also, they can short stocks a whole lot easier. Passive investors never gain this experience.
Assuming that the average reader in Seeking Alpha is an active investor, the question today is, how should one have played, and play from now on, Apple (AAPL) and Research In Motion (RIMM)?
Please note that an active investor can be a long term investor if he wishes so. Long term investors or passive investors on the other hand, can not behave like short term active investors, because they do not have the knowledge and experience or the mind setting to do so.
On September 7, I told you, in reference to Apple, to take the money and run. I will not go into all the reasons why you should have sold Apple then. Besides the previous link, see my sell Apple logic in my previous posts here.
According to my previous analysis, Apple is a prime contender to become a future dog stock. By that I mean that it will not give long term investors decent returns from now on. As such, the stock should be swing traded and not held long term. Past returns are not indicative of future returns and investors (according to me) should not expect the kind of returns they have enjoyed with Apple in the future.
So at the $700 mark, I told you to sell Apple. I have also told you that Apple will be a buy (as a swing trade) somewhere in the range of $480 and $520 dollars. So far, I have been in the money. Apple indeed traded in that range on Friday. So officially, Apple is in buy territory as per my previous posts are concerned.
On September 10, three days after I told you to sell Apple, I told you to buy Research In Motion as a speculation play. I have since upgraded RIMM from a speculation play to a special situation play. You can read my RIMM buy logic here.
Now if you would have followed my logic and sold Apple at the $700 mark and bought RIMM, you would have made 50% on your money, as opposed to having held on to APPL and lose money since then. The chart below is indicative of what has happened since September 7.
Apple is a weighing machine stock. Its balance sheet has been analyzed by the whole planet and there is nothing unknown about Apple. Apple is also a value and long term investment play. As Graham said, an investment is "an operation is one which, upon thorough analysis, promises safety of principal and an adequate return". An adequate return with interest rates at zero, is probably not a whole lot these days. As such, buying and holding anything that is very safe will yield you very little.
RIMM, on the other hand, is a voting machine stock. The verdict is still out on if it will become a value play or if it will survive at all. However, this is also the appeal. See RIMM has the potential to become a 5-10 bagger. Apple can never become that again. RIMM's price is also guided by short term sentiment and players that understand market psychology. You don't need market psychology to buy Apple. You know it is a safe bet, even though you might lose money in the short term.
If you are a long term investor, you can afford to buy Apple and fight the tape. But if you are an active investor, you can not afford to fight the tape. You have to go with the flow, for the tape can remain wrong longer than you can remain solvent.
Also, if you are an active investor, you probably want to develop some sort of arbitrage technique as the one described here. Total returns will depend on how you interpret short term market trends and how you interpret market psychology, for many times you have to be a contrarian and go against the herd.
Because as in the case of Apple and RIMM illustrated above, where you bought them and where you sold them can make a heck of a difference.
As far as RIMM is concerned, my recommendation is to hold on to it for the time being, because the chances of it going to $11 from here are very high.
Also as per my previous recommendation, Apple is a buy from these levels. However, I think it will muddle around these levels for a while and wait for RIMM to go to $11. When that happens, I think the correct play at the time will be to sell RIMM and buy Apple for the short term.
Of course we do not know if RIMM will actually go to $11 or even if Apple bounces from these levels. That's why short term (active) investors need to follow the market's logic and keep a close eye on the tape, for nothing ever happens as you plan on it. But it never hurts to plan ahead anyway.