Imagine a hot new technology spreading Gangnam-style across the globe. One company jumps into the lead, rolling out must-have innovative products that consumers go ape for. Sales and profits explode as the corp and its stock achieve cult-like status. Investors fall in love and drive shares skyward. Then competitors flock in, and the tech stock implodes.


Ninety years ago that was RCA. Now it’s Apple. Then it was radio, now it’s web-enabled devices. The name and the technology changes. The humans don’t.

So on Thursday Apple investors lost $175 billion as the stock dropped by 12%, continuing a slide which has taken it from $700 a share to $450 in just four months. The means the company is worth 36% less than it was in September. Anyone who bought the stock as it bloated last autumn, as so many did, now faces a tough choice. Buy more to dilute the dumb mistake? Or bail and avoid a train wreck?

By the way, RCA stock crashed and burned, in part because it was swept away by the market crash of 1929. But it sure makes ya wonder


Apple groupies are like metalheads or house-pumpers, one-trick ponies who think they know more than the mortals around them, convinced gains of the past will soon repeat. Hubris drives them, sometimes over a cliff. The hardest thing they face is admitting a mistake or selling at a loss. Human nature makes it impossible for most people to dump an asset that’s jumped in value (‘why sell when there’s more coming?’) or bail when it plops (‘I’m just waiting ‘til this baby comes back’).

Some say Apple is cooked as the world’s most valuable company. No, it won’t fail. Far from it. But it’ll never again see seven bills a share. A year from now, without inventing something new and sexy, analysts say shares could be $300, or less. It’s all about momentum, and AAPL is losing it. Sales fall off too fast after product launches, while Android interlopers like suck off market share.

At $700 the market said Apple was cool and sustained, rapid growth was expected. This month it’s all about Samsung, where profits have increased 76%.

I bring this up for a good reason. On Thursday, while Apple stock was being slaughtered, most major US stock markets went up. In fact the S&P 500 is ahead 4.81% in the last three weeks, and 13.7% in the past year. It’s at a level last seen five years ago, and 4% below its all-time peak. The Dow is even closer, dangling just 2% under its best-ever showing in the autumn of 2007.

This advance has come because of corporate profits and economic growth. Of companies reporting Q4 earnings, like Google and IBM, 73% of them have beat expectations. The latest jobless claims numbers shocked because they were so positive, dropping to a five-year low. In Washington the debt ceiling debate’s turned into the non-event it was always destined to be. In China, manufacturing is growing at the fastest rate in two years. American real estate has bounced off the bottom three years sooner than expected with almost all major markets showing higher sales, rising prices and surging construction. Unemployment across the US is now lower than it is in Toronto, and people in Chicago or Boston can actually afford to buy detached houses in a major city.

In short, smart people want to own this growth. It’s what I told you to expect a year ago when I sent the metalheads, doomers and Depends set into gales of laughter with my ‘don’t bet against America’ routine. Despite its debt and deficit challenges, the US will only augment each month in terms of GDP, jobs created, corporate profits and consumer spending. There will certainly be volatility for investors, but the road ahead seems clear.

So what of Apple? So don’t buy individual stocks. How could there be a more relevant example of investment myopia?

Dumping a hunk of your net worth in one company, or three or twelve, is courting risk. Mr. Market is easily aroused and as quick to vengeance. Disappointment can bring a brutal wave of selling and punishing losses, even when a corporation is massive, popular and profitable. Unless you have seven figures to invest, better to own thousands of companies through something like an ETF. For example, the major Canadian exchange-traded fund replicating the performance of the S&P is ahead 14% in the past year, and has a management fee of just 0.25%.

But that’s just one aspect of successful investing. Owning the S&P should come with owning the whole TSX60, international markets, plus a basket of REITs, preferred shares and certain bonds. You need three things, besides sex and water, my mom always told me: diversity among asset classes, balance between growth and safety, and liquidity to move as fast as the times do.


No one asset gives you all that.

It’s something gold nuts, the house horny and cowboys with junior mining stocks will never understand. And perhaps will never recover from.

So if you are reading this on a shiny new iPad, let us pray.

avatarGarth Turner - The Greater Fool posted Thursday, January 24th, 2013.

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