Unlike Eve, if you had picked Apple early on you are lucky. I bought 300 shares of Apple stock when it was $250 a share. Of course, at that price I couldn¬ít afford to buy much more than that. I bought it because a friend and colleague had moved all of his portfolio into that stock, and since he is an expert in the computer industry, I figured that he knew something I didn¬ít know.
When the stock hit $400 a share, I picked up my winnings and sold the stock for a profit of $150 a share, or $45,000. My friend held his, saying that it was worth $1,000 a share.
It soon became clear that I had picked Apple too soon. The stock continued to rise until it was over $600 a share. I warned my colleague that it might be time to sell. ¬ìIt¬ís worth $1,000 a share¬î he replied. Then the stock dropped down to $530 or so. At that point I decided to take a bit of a risk and sold a 10 put spread at around $530, with a hedge at $515. So for a maximum risk of about $15,000 less a $6,000 premium received, I was back in the game. But in a much smaller way.
So far the stock has held most of its value, and recently moved back up over $560. One could say that I left $60,000 on the table by not holding and selling at $600. My colleague says I¬íve probably left a lot more than that on the table because the stock will go up much more when the iPhone5 is released and Apple starts promoting Apple TV. This does seems like a strong possibility. I recently attended a lecture on Apple TV, and I am really impressed with it, and plan to install it in my home soon. I especially like the wireless loudspeaker features that can be controlled remotely from my iPad.
On the other hand, I read an article recently by a business professor who describes hi-tech business cycles. His theory is that every hi-tech company is eventually superseded by some new concept with bigger and better technology developed by competitors. And who is to say that I would have sold the stock at $600 or more, at the top? And who can say that it will hold at the mid 500s level, and not return to $400?
Some professions operate on a theory that I call ¬ìthinning out the herd.¬î They set a percentage of the portfolio that should be invested in hi-tech or other fields, and when the value of the investment gets over that percentage they sell enough to get the portfolio back in line.
My wife has a similar theory. When a stock goes up a significant amount, she sells half of the holding and takes half of the profit, and holds the balance.
I follow a different theory, that I call ¬ìthe apple doesn¬ít fall far from the tree.¬î By that I mean that there is a certain momentum in the stock market which usually, but not always, causes companies that have a big run up to run up beyond true value based on a market psychology effect. But the true value is like the falling apple, it tends to be closer to the tree than the perceived apple that is perceived to fall and keep rolling. So when investors see a genius like Steve Jobs create a number of extremely successful products, they assume it will continue. While that prediction might prove to be correct, the resulting price is based on speculation, not on facts, and is therefore akin to the pricing of gold more than the value of the individual stock. So the trick is to get into this bubble at the outset, but get out before it bursts.
The result of that theory is that more often than not I sell before the peak, and leave something on the table. On the other hand, I tend to capture some profit on stock holdings more often than those who wait for the top, and hold too long.
For those that use stock options, selling by using a short call option is frequently a good way to pick up a few extra dollars. So if you are holding Apple stock at $560 and would feel good about selling if it goes back up to $600, you can sell 30 day calls on your stock, and it will be called away when it reaches $600 a share. Meanwhile, while you still hold it, you collect in dividends plus option premiums each month.
On the other hand, if you start to worry that the peak has been reached and the perception of further increases might decline, causing the price to decline, you can sell ¬ìin the money¬î call options and take in an immediate premium with some assurance that the stock will be called away (sold) during the next 30 days or less. In this scenario, with the stock at $560, you might decide to sell the $550 calls and take in an ¬ìintrinsic value¬î premium of $10 a share, plus some additional time value premium. If the stock does not go below $550 a share during the following 30 day period you will sell it at $550 and keep the premium you collected.
As is so often the case, success depends on timing. Everyone knows that you don¬ít want to pick the apple too soon. And everyone knows you don¬ít want to let it rot on the tree by waiting too long. But how do you tell when it¬ís ripe for picking?
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.