In this article, I point out something objective and obvious that it seems practically everybody else is missing. But, maybe more importantly, I offer thoughts and at least one realistic way for long-term investors, who prefer not to take a loss, to manage a relatively rare red position in Apple (AAPL).
I give you AAPL's three-month chart, courtesy of Yahoo Finance:
Put down the Champagne glasses for just a second. Turn down the ghettoblaster. Tell the pizza delivery boy to wait at the door. Have a look at the chart.
That's right. AAPL has not returned to its all-time closing high of $636.23. And, obviously, it has yet to test its intraday topper of $644. Before you call the House Un-American Activities Committee, hear me out.
Ultimately, I do not think this will end up mattering much. I fully expect AAPL to soar to $750 at some point before the end of the year. That, however, is far from a certainty. But, stepping away from predictions and price targets for a minute, we can all learn a lesson from what's going on with AAPL.
To be fair, one lesson might be to have not expressed caution ahead of the last earnings report. However, I do not feel like I ever lose by not making a trade. Even if the trade turns out a winner. No matter how big, I have been at this long enough to view winners (and losers) as a series of trades and investments, not in isolation.
As I noted in a recent Seeking Alpha article, Apple euphoria can contribute to our decisions to make bad trades. Even though Apple had another blow-out quarter and the stock soared, plenty of folks are stuck with out-of-the-money options heading towards worthlessness. They sit on losses because they had unrealistic visions of $650 and $700 in their head too far ahead of schedule. They made low-probability trades that, you cannot deny, were at least partially fueled by emotion.
I expanded on the impacts of emotion in an article I wrote over at TheStreet:
There's a danger, however, in not looking ahead and considering worst-case scenarios. It's a psychological process. With every one of the aforementioned "rinse and repeat" cycles, some longs will find themselves getting even more "loyal" and emotional. As that internal fervor grows, all logic goes out the window. Making money, whether the long knows it or not, becomes secondary. It's all about being right, but, even more so, seeing the story through.
Apple euphoria hit a fever pitch in that April 9-10 time-frame when the stock notched the two aforementioned highs. Of course, we only hear from AAPL longs who take the time to comment on a Seeking Alpha article from their iPhones while signing papers at the Ferrari dealership. Rarely, do the bagholders make themselves public.
These are the people who got taken in by the bullish mob scene somewhere between $636.26 and $644.00. Everybody else at the party is making frequent trips to the bathroom and icing kegs, meantime the bagholder sits in the corner making love to his tonic and gin wondering why he's not having that much fun.
The bagholders bought the top, but you would never know that these people even exist. They're like the forgotten children of the Third World. We might need Sally Struthers to fire up a public service announcement or two in support. AAPL bulls sitting on apparent treasure chests worth of profits have no time for them.
Again, I expect these investors to be just fine. It's only an on-paper loss and if all continues right and just with the world, AAPL will kick $644.00 like a bad habit on its way to the 700 Club.
But, as an investor, you have to consider the worst case scenario. What if, for some unknown reason, the seemingly inevitable rebound does not happen? What will (or would) you do?
Of course, you could stop yourself out of the position. That's the smart thing to do. Cut your losses. But, our emotion often stops us from doing the smart thing. Instead, we would probably see AAPL all the way down to $500 first.
I am not against averaging down. In fact, I do it with Pandora (P) and take a lot of ribbing for it. I explained my reasoning behind doing this here and here. There's a bit of a problem, however, with averaging down in a high-priced stock like AAPL. Who can afford to do it effectively?
In P, I could have purchased 100 shares at $12 for $1,200. When it dumps to $8, it only costs me $800 to bring my average down to $10. In AAPL, it took $64,400 to get 100 shares at $644. I am not sure who has a spare $60,200 laying around to knock the average down to $623. So, while I do not dog the idea of averaging down in a stock you think has a solid long-term future, it's likely not feasible for most of us in AAPL.
The only almost-universally feasible choice, other than what's probably the most prudent one (sell and take the loss), is to write covered calls. If you bought AAPL at the top, you could sell the June $650 call and collect about $10.00 in premium income ($1,000). That brings your effective cost basis on the stock down to $634 ($644 minus $10.00). If you get your shares called away you cap your gains on the original stock trade at $6.00.
Of course, you could always tweak the strikes and expirations you choose to sell to suit your fancy. While this might not seem like the best strategy to some, particularly the "I refuse to sell at a loss" style of investor, it's better than having all emotion and no plan at all.
Disclosure: I am long P.