Apple Stock Price Go Boom

The action in Apple (AAPL) merits some discussion. As you know by now the earnings report disappointed the street, the stock sold off in shocking fashion after hours on Wednesday and the selling persisted on Thursday closing at $450.50 down 12.35%. It sold down a little more after hours yesterday to $448.20 (the last I looked).

The stock peaked very famously at $705 in September and after yesterday's decline is down 35% from that peak. Apple has been a great hold for many years, it makes expensive products that a lot of people buy and love and all of this has lead to something of a cultish devotion to the stock. This article at Seeking Alpha yesterday recapping the earnings report and offering an opinion about future prospects drew 247 comments and you won't need to read to far into the comments to get the sense that the cultish devotion is alive and well.

As you can imagine the latest in Apple dominated CNBC's market coverage yesterday (actually it does on most days) including one money manager who admitted to be too bullish when the stock was at $700. The sense I got was that he was long all the way down without having reduced his position. I did not hear what his entry point was so he could still be very profitable in the name. I also did not hear any mention of the size of the position in this portfolio.

I write often about managing position sizes in the portfolios I manage. If the above manager let the position grow to 5 or 6% and still has all his shares then it would now be about 3.33-4% of the portfolio and a 166-200 basis point drag on the portfolio since the peak. While any manager would rather not have a 200 or even a 300 basis point drag on the portfolio they manage, there is no financial deathblow to clients.

The same holds true for do-it-yourselfers. James Montier talks often about permanent impairments of capital. Being completely wrong about a 5% portfolio position is not going to permanently impair a diversified portfolio.

Unfortunately there are many professional and do-it-yourself portfolios with positions large enough to cause permanent impairment. Many people bought early and held on without selling and now the name is down by 1/3 but these were not 5-6% positions, more like 20-30% positions. We've probably all read about hedge funds with positions even larger than that. maybe even the manager mentioned above. A long time ago when I worked at Charles Schwab, anytime there was a big one day blowup like this (and this one wasn't even that big) there would be a slew of margin calls and I have no doubt that is the case now.

To read articles and comments over the years there was a sentiment that built up that I think believed the stock could not go down but of course it has. Any stock can go down and for that matter any stock can go to zero. It is not probable that a given stock will go to zero but history is full of improbable names that did indeed go to zero.

We've been active in the name over the years and disclosed that as we've gone. Our first exposure came by virtue of tech sector ETFs that owned AAPL at around 10-12% when we first bought in the middle of the last decade. Apple grew within the ETFs into the low to mid 20 percentage point area due to Apple's relative outperformance which means our portfolio weight had grown to 4%.

Long time readers may recall that I typically target individual stocks at either 2 or 3% however I typically don't rebalance down from a 4% weight in one stock but I did with AAPL in late August of last year for reasons I talked about here when the stock was at $675. I did this by selling half of our Apple heavy tech ETF and rolling those proceeds into the First Trust Technology Sector Dividend ETF (TDIV) which for now does not own Apple thus going from 4% in the portfolio to 2%.

Then a little over two months later we bought the stock directly at about a 2% weight at around $573, this in addition to our exposure from the one tech ETF. The stock had fallen quite a bit but it turned out to be a poor entry point. I then concluded I did not know it as well as I thought and we sold the common a week and a half ago just under $505. We still have exposure by virtue of the half position in the one ETF at a weight that is just under 1.5% (AAPL is 1.5% not the ETF).

The point is not that you will be precisely correct with every trade but that employing some form of discipline and sticking to it is crucial for avoiding serious impairment. There were a couple of different disciplines here I think. One was being cognizant of position sizing (the sale at $675 has helped the portfolio) and the other was realizing I lost touch with the stock somehow--clearly the buy was a drag on the portfolio but not a permanent impairment because of the sizing--and selling upon having this realization.

Obviously any individual stock you buy you will think you understand it but you will be wrong occasionally and that is a reason to sell. Maybe you will be wrong right out of the chute and realize a little later or maybe the story will change in such a way and you process the change incorrectly but either way realizing you are wrong about some aspect of the stock is a good reason to consider selling.