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Eating Away At Your Apple Emotion

|About:Apple Inc. (AAPL) Includes:The Walt Disney Company (DIS), HD, HPQ, SPG, XOM

It is somewhat startling when we put comparative perspective on Apple's (NASDAQ:AAPL) roughly $250 billion in lost market cap over the past 4-5 months. Yet it gives us an idea of just how large this company was, and with a market cap of around $400 billion, still is. There are only nine domestically based corporations that had total market capitalizations of over $200 billion based on January 24 closing prices.

Company Market Cap 1/24

Apple Inc.


Exxon Mobil Corporation


Google Inc


Wal-Mart Stores, Inc.


Microsoft Corporation


General Electric Company


International Business Machines Corp.


Chevron Corporation


Johnson & Johnson


Click to enlarge

Apple' s lost value would have independently wiped out every domestically traded company with the exception of Exxon (NYSE:XOM). Two hundred fifty billion would have also erased the value of Home Depot (NYSE:HD), Disney (NYSE:DIS), and mall kingpin Simon Property (NYSE:SPG) combined. For those that have watched 35% of the company's paper value erode over the near-term, it has probably been somewhat painful and disheartening to watch.

AAPL (6 mos.)

However, as investors we are more concerned with where securities are headed rather than where they have been, therefore it is not wise to dwell on the past. Indeed, focus needs to be on making prudent security-specific decisions that position one's portfolio in an optimal manner for pursued investment goals.

What I Won't Tell You

While I currently own a small position in Apple (<1% of overall portfolio), I will not tell you whether you should buy, sell, or hold. I'm going to leave that to others on Seeking Alpha that have more strident opinions. However, because of the variety of ways this stock can be viewed, the huge number of pundits that abound, the volatility, and the undeniable emotion that follows in its path, Apple, in my humble view, is not a slam-dunk stock everyone should be buying in hopes of a price recovery.

What I Will Tell You

Whether you've owned Apple for a decade and have a large embedded gain, bought at the recent top and are suffering with a loss, have no gain or loss to speak of, or are considering making a first purchase, do not act upon this company with emotion. Security specific portfolio decisions should be done deliberately, not with haste. Emotional decisions are what smart investors should always be looking to take advantage of. Do not fall victim to them.

Going out and spontaneously buying more of something because you are angry with the market or conversely making a knee jerk sale because you are frightened you may lose more are about the worst things you can do when extreme downside volatility strikes a portfolio holding. My advice is to take a deep breath, collect your thoughts, and take some time this weekend deciding how to approach Apple's place in your portfolio.

What To Contemplate

I feel the following three questions will take emotion out of the equation when it comes to analyzing and acting upon Apple, or any down trending position:

1. Has Your Investment Thesis Changed?

Why did you invest in the stock to begin with? Has anything really changed since the earnings announcement? Do you think the company will continue to bring new, revolutionary products like iPad and iPhone to market or will the future be more dependent on the evolution of existing products? How confident are you in growing revenue and earnings?

2. What percentage of your overall portfolio does the stock compose?

The larger the percentage of your Apple position in your overall portfolio, the larger the risk you are taking. A well diversified portfolio mitigates the impact that any one losing position can have on the overall portfolio. Despite the tendency to let "winners ride," I would argue that that's not necessarily a good idea, especially when the position becomes extremely concentrated. If Apple still composes a large portion of your portfolio, consider paring back simply for diversification purposes, even with the stock 35% off its highs.

On the other hand, if your investment thesis remains in tact, taking the opportunity to add another tranche here might make sense for your portfolio if you are underweight. I would add that from technical perspective it is generally considered dangerous to catch a falling knife.

3. How much more stock price destruction can you and your portfolio tolerate and are you losing any sleep?

While one might think they are smarter than the market at any given point in time, I would argue that such thought is necessarily dangerous, a la the falling knife. Apple's 35% decline should be telling you something, and you shouldn't assume that just because you disagree with the market's treatment of the stock, that the market is wrong in continuing to punish it.

The technology landscape continues to evolve and while it may be difficult to envision a devastating downtrend in Apple, I doubt many thought that Hewlett Packard (NYSE:HPQ) would lose 75% of its market value and sit at 10-year lows after hitting all-time highs just three short years ago. Things happen. Things change. Investors lose lots of money when an investment thesis proves wrong and they hold on too long.

For that reason, if you haven't already, you should set a limitation on the amount of "pain" you will withstand during a continued Apple downtrend. One can do this nominally or percentage-wise. Determine the amount you can afford to lose and automatically set a stop through your broker. Sometimes it's best to walk away from an idea that isn't working and move on to a better one. There are always other fish in the pond.

If you are losing sleep over what is happening, you should consider taking action sooner rather than later. Either you have too much invested in Apple or it's not a stock you should own at all.

What You Should Do

Whether it is via a paper gain that has vanished or paper loss that materialized, watching a stock drop the extent that Apple has is a painful, humbling experience. Whatever kind of investor you are, keep your wits about you, consider the questions I posed, and above all else, avoid an emotionally charged knee-jerk reaction when volatility heads your way.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.