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In my October 26, 2012 article, "Why Apple Is Still A 'Don't Buy," I discussed why I felt investors interested in allocating money to Apple (AAPL) should hold off for the time being. That article was a follow up to another article from early October in which I also stated that Apple was not a "Buy." For investors solely focused on a company's fundamentals, it can be incredibly frustrating to watch a stock sell off in a major way with no clear breakdown in the company's health to blame for the sell-off. The recent 18.48% pullback from its 52-week high and 9.94% drop from my early October article would certainly be an unwelcome event for anyone recently putting new money to work in Apple.

I received several messages from people who enjoyed the chart-based approach to the reasoning behind my previous "Don't Buy" Apple call. Discussions on technical analysis can sometimes become far too focused on esoteric-like tools that end up providing too many false signals. But that is not to say there aren't some basic forms of technical analysis that provide tremendous value. If you are interested in one such form of technical analysis, please read my two aforementioned Apple articles from October for a discussion of Apple's moving averages.

For readers who frequently browse the multitude of Apple articles that are published each day, you may be accustomed to seeing the many very emotionally driven comments and conversations that follow the articles. As I have perused the comments over time, I've discovered that when it comes to many Apple investors, two cognitive biases in particular seem to be alive and well. In my new book, The 5 Fundamentals of Building a Retirement Portfolio, I go into much more detail than I can in this article on the relationship between cognitive biases and investing. But I would like to briefly touch on what I view as perhaps the greatest weakness for many Apple investors: confirmation bias and the endowment effect.

It is fascinating to read the comments on articles that have a non-bullish tilt for Apple. If you only read the comments attached to my aforementioned articles, you might think that I am the biggest Apple bear to walk the planet. This is far from the truth. Regarding Apple, I am neither a bull nor a bear; I am a realist. I recognize Apple for the great company that it is, but I also pay attention to the story the price action on the stock is telling. I then communicate what I see to investors in order to provide food-for-thought and to share new ways of looking at a stock. In short, I, as plenty of other Seeking Alpha contributors, write in order to try to help people become better informed investors. But when cognitive biases such as confirmation bias and the endowment effect are not controlled by investors, it is easy to overlook the merits of an article.

To quote from Chapter 9 of my book, confirmation bias refers to "the tendency to favor information that supports your beliefs and to disregard or misinterpret information that does not support your beliefs." The endowment effect refers to people valuing something more than they otherwise would once their ownership of that thing has been established.

If you are an Apple investor who becomes impassioned when reading articles that are anything but bullish on the company's stock or find yourself constantly disregarding every piece of non-bullish information you come across, consider the role that confirmation might be playing in your portfolio. Of course, there may be legitimate reasons to doubt non-bullish information. It is the manner in which investors disregard or misinterpret information that will determine the extent of confirmation bias. If you are an Apple investor who recently purchased the stock and find yourself suddenly thinking the stock is worth far more than you ever thought it was worth prior to purchasing it, you should consider the role the endowment effect is having on your investing.

To be fair to Apple investors, they are, as a collective whole, not the first group of investors to let their cognitive biases affect their assessment of a stock. Long-term investors who owned Cisco Systems (CSCO), Intel (INTC), Microsoft (MSFT), and Broadcom (BRCM) through the crash of the dot-com bubble clearly owned companies that would have a lasting impact on the world. But they didn't find stocks that would have a lasting positive effect on their portfolios.

I will be the first to admit that over a multi-year period, I have no idea where Apple will trade. It could far surpass $1,000 per share or drop another 50% from today's level. Only time will tell. But while you are following Apple's successes and difficulties over the coming years, be sure to constantly keep in mind the roles that confirmation bias and the endowment effect may be playing on your outlook for the stock. If left uncontrolled, they can turn into an investor's greatest weakness. Keeping those cognitive biases under control will be an important part of ensuring that you are accurately assessing Apple's fundamentals as time goes on.

Source: Apple Investors' Greatest Weakness