Apple's Rise Means It's Time For This 5-Step Action Plan

May 24, 2012 4:38 PM ETApple Inc. (AAPL)39 Comments
John Tobey, CFA profile picture
John Tobey, CFA

Blackboard with list of 5Apple's (NASDAQ:AAPL) double-dip drop had many investors worried. Now, with its 10% price rebound, there is some relief and even hope. This is the perfect time to do something, and here is the time-tested five-step plan to figuring out what that "something" is.

First, revisit the ruling reason you bought Apple

There is a primary reason behind every stock purchase. Keep that reason paramount, and don't change it because of Apple's price movements. This step requires being "honest." If you bought Apple because it looked like a sure bet to rise, then that is the reason. "Easy money" can compel many a trade. The key is not to defend your decision by changing the ruling reason - for example, by now focusing on Apple's earnings, dividends or cash holdings.

Second, objectively view today's situation

Apple's shift from steady up to wavering down is more than a simple trend change. Three corollary shifts are also occurring:

Investor uncertainty is returning. The 75%-plus move (from $360 to $640) took the stock from investor uncertainty (Jobs' death and a disappointing earnings report) to investor certainty (Apple's superiority and continuing price rise). Certainty (AKA over-optimism) is an untenable investment condition. The shift to normal uncertainty is causing the stock price to adjust.

Fundamental uncertainty is building. First (following the first dip) came the list of Apple's natural uncertainties, bringing out the issues ignored during the run-up's final stages. Now analysts are examining newer potential negatives (e.g., PC competitors' coming Ultrabooks and wireless companies' desire to reduce iPhone subsidies). While Apple may come out ahead of the pack, the building uncertainty means the stock price is adjusting.

Stock price volatility (uncertainty) is increasing. Because the steady rise had few resting points, investors are having trouble identifying natural support levels. As a result volatility has picked up, augmented by

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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