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It is my belief that excessive bullishness on Apple (AAPL) has destroyed a number of retail investors' portfolios. When I first started reading Seeking Alpha, I noticed extreme, almost worrying bullishness. It wasn't just that people were bullish, but it was that nearly everybody was bullish. Any author that even thought about writing a non-positive article about the stock was subjected to one of the following:

  • Name Calling: Apple bulls would frequently make ad hominem attacks on bears and/or skeptics.
  • Bragging: So, how many Apple bulls bragged about their "huge" paper gains? Many from the high $300/low $400 range, but you even had some of the guys who claimed that they owned Apple at $5 and hadn't sold a share. Or how about those massive paper fortunes that these folks claimed that they had built for their grandchildren by making the highly prescient decision to buy and hold Apple from $10? Yeah. Don't hear much from them anymore, do we?
  • "It's A Sure Thing!": I remember how "sure" the bulls were that the stock was going to go to $1,000. This was predicated on static margins, dramatic growth in sales, and no real threat from competition. Throw in a little earnings multiple expansion for good measure. Whoops! That didn't happen. Apple bulls seemed to discount any possibility that things may not pan out as expected.

Now, despite some arguments that Apple's "cheap" and will go up, the future for the stock is quite bleak. Margins will likely continue to erode, iPhone/iPad market share is likely to be lost, and these will probably not be offset by market share growth in the relatively low volume Mac market since the TAM there is quite small. At least that's what Wall Street thinks and that's what drives the share price.

That being said, the stock may be due for a bounce purely on valuation, but it's still risky. The sentiment is still bad, the technicals don't look great, and nobody is really sure where the margins/market share is going to bottom. There are better, safer stocks on the market right now, so trade Apple at your own risk.

But Apple's stock today and going forward isn't that important. I am writing this to point out the lessons that absolutely must be taken away from the Andy Zaky/Apple disaster, along with many of the fortunes I saw destroyed here on SA (unless the folks in the comments section of Apple articles weren't being truthful about all of the $800 calls they owned).

Bullish Cross: The Apple-Only Hedge Fund

I'm sure that most people involved with Apple stock are quite (painfully, perhaps) aware of a Mr. Andy Zaky, a former Seeking Alpha contributor and founder of "Bullish Cross," essentially an Apple-only hedge fund. Mr. Zaky gained a lot of fame for his deadly-accurate calls on Apple's earnings, iPhone sales, and so on. Thumb through his articles here on Seeking Alpha, and you will see that for years he was making some pretty solid calls on Apple time and time again.

However, it seems that Mr. Zaky lost nearly the entirety of the $10.6M AUM ("assets under management") for his clients with some ultra-bullish options bets that went to zero. I will now dissect this tragedy and try to salvage the important lessons for investors to really take to heart.

Key Lesson #1: You Could Be Wrong

You can and will be wrong whenever you make investments. It's that simple. When it comes to the stock market, nothing is a sure bet. Sure, there are some things that have fairly high/low probabilities, but never discount the fact that you could be dead wrong. Even if you're 100% right about the fundamental drivers, you can still totally screw the pooch on what multiple the market is willing to pay for the stock.

Mr. Zaky wasn't necessarily wrong that Apple would keep pulling in massive cash flow, but he was wrong on both the technicals/sentiment as well as the uncertainty of the future of the fundamentals of the company. When the latest guidance was issued, things looked ugly. Margins coming down, revenue growth slowing, and worries of competition became more evident than ever.

The bears predicted this, Apple's SEC filings said that this was a significant risk factor, but the bulls ignored it. Even if you don't believe that you're wrong, understand that you may be wrong and be prepared to preserve your capital/profits in the case that you are.

That brings me to my next point: risk management.

Key Lesson #2: This Isn't Vegas...

You know what Andy Zaky's problem was? He ran a hedge fund but did precisely zero hedging. Not only did he not hedge, but he was levered to the teeth betting on a single direction. I mean, heck, why didn't the guy just take all of his investors' money and go to Vegas?

But in all seriousness, if you're managing a nontrivial portfolio, your #1 goal should be to make sure that you don't lose your shirt. If you have a $300,000 portfolio, then perhaps use dividends from your more stable players (you do have dividend payers, right?), or use cash raised from covered call selling to make some more speculative bets (penny stocks, deep OTM calls, spreads, etc.). The point is, unless you have infinite money, you can't afford to risk a significant portion of your portfolio on investment products that can go to zero.

And for heaven's sake, own more than one stock/ETF! Diversification in a large portfolio is mandatory!

Key Lesson #3: Stay Calm!

In the recent article detailing Zaky's tragic mistake, the following passage really stuck out:

Zaky lost nearly 50% of the fund's capital in one month (March) by buying bearish put spreads just before the stock rose 10%. The fund also managed to get crushed when the stock went down. In May, when the stock fell nearly 100 points, Zaky had bet heavily on bullish calls spreads.

Zaky must have been incredibly scared/desperate to get it so terribly wrong twice. Shorting when he should have been long and long when he should have been shorting. The man wasn't thinking straight, and it is because he didn't stay calm.

When you lose 50% of your fund's capital, you are hurt, in bad shape, and are not in any real capacity to make any more decisions. The problem is, Bullish Cross, as far as I can tell, was run by one individual. Real hedge funds have more than one person doing research, trading, and figuring out exactly what to do. When you have one individual with no professional training managing $10M+ all by his lonesome, emotions (fear/greed) are very likely to lead to some very bad decisions.

Key Lesson #4: Only You Are Responsible For Your Trades

You are responsible for your own trades. I know as an author who writes about stocks, I have made calls, but at the end of the day, you need to do your own due diligence and be ready to accept both the reward and risk. I like to think that I make decent calls (when I make them explicitly), but I strike out, too, just like everybody else. Andy Zaky's information should have been used as one data-point amidst a sea of information.

In short: if you lost $50M following Mr. Zaky's advice, then I'm sorry, but my sympathy for you is limited. Not only is this an obscene amount of money to put into any one investment, but putting it in ultra high risk call spreads is just asking for disaster. Putting that $50M into a basket of ~4% yielding stocks would have allowed you to earn more in dividends per year than most folks will ever see working even reasonably high powered jobs. Shame on you.

Now, the poor schmucks I feel bad for are those who actually put money into this guy's fund. Again, trusting some guy on the internet with no real investment track record is just asking for disaster, but they at least weren't directly responsible for the trades - but these individuals also knew what this fund was about.

In short, if you follow someone else's trades/advice, take responsibility and know the risks. If you give your money for someone else to manage, you'd better check their track record managing huge sums of money. Some dude who gets one stock right during a bull run isn't a "track record."

Not even close.

Conclusion

Your money is serious business, and risk management is something that professionals get paid heavily to do. Putting your eggs in one basket is a lunacy (unless your portfolio is tiny). Trusting your money to a "hedge fund" that deals exclusively with high risk options plays on one momo stock is unwise. Panicking is deadly.

Learn the mistakes from Andy Zaky. This sort of fortune-ruining disaster happens every day in the markets, and this is just one high profile case.

Source: Apple: Learn From Andy Zaky's Mistake