Thursday, July 21, 2011

The Lesson I Learned With Apple Stock

This post has more to do with investing than libertarianism, but I thought some people might benefit from it.  I am an advocate of imitating the permanent portfolio as described by Harry Browne in his book Fail Safe Investing.  This should be your core holding, making up at least 50% of your portfolio.  I also tell people that it is ok to speculate as long as you understand the risks and that you could easily lose money.

A few years ago, I decided to speculate a little.  I bought a few shares of Apple stock when it was less than $100.  At that time, everyone I knew who owned a Mac computer loved it.  I did not have one at the time, but I own one now.  The operating system seems much better than Windows.  The only thing Apple that I owned at the time was an iPod.

I knew that Apple had something going.  They are an innovative company.  We can see that now, not just with computers, but also iPods, iPhones, and iPads.  I figured that they would start taking a substantial share of the market away from Microsoft with computers, plus all of the potential profits from the other products.  So with all of that in mind, I bought some shares for speculation.

Usually mistakes are made on the buy side of an investment.  In this case, it wasn't.  My mistake was on the sell side.  The stock went up quickly after I bought it.  I can't remember the exact return, but it was something close to 50%.  I sold all of my shares.  I even thought that I would buy back on another dip.

Here is the problem.  There wasn't really another dip.  The stock has been way up for the last couple of years.  I would have about a 400% return right now if I had held it.  Of course, there was no way to know for sure.  Usually it is a wise thing to take profits.

In this case, I did not stick to my plan.  I was buying the stock for its long-term outlook.  I thought it had huge potential, not just a year into the future, but for many years.  The company has very popular products and it is constantly innovating.  I should have stuck to my plan, which when I bought the shares was to hold them for a substantial period of time.

Again, it is hard to kick myself too much for taking profits, especially when I have lost money with other speculations.  But the lost opportunity was big.  Here is what I should have done, not knowing what would happen at the time.  I should have sold off half of my shares and let the other half ride.  It is a little messy for reporting capital gains, but I should have dealt with it.

One place where investors often get into trouble is when they have an "all or nothing" attitude.  If you are not sure whether to sell stock in a particular company, then sell half.  You also don't have to go for broke when buying something.  Just dip your toe in.  Give yourself an opportunity to make a decent profit while limiting your potential losses.

This story has little to do with Apple itself.  Whether it is a good buy now, I have know idea.  It is still a great company with a lot more potential, but maybe we will see that big dip that I've been waiting for.

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