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Finding Buying Opportunities: An Analysis of My Apple Trades

6 May 2008 19 Comments

Apple (AAPL) is one of my favorite stocks to follow for a number of reasons. For one, I believe the company to be incredible with regards to innovation and the way they push the envelope with their products. I love it as a long term investment, and I love to follow the shifts in momentum and volatility that cause the stock to move quickly up and down. I wish to analyze my performance with regards to trading Apple over the past year in order to learn from my mistakes and make more frequent my successes. I hope you can learn from this analysis as well.

Trading activity since May 1, 2007 (shown in the chart below):

  • 5/1/2007: BUY 33 shares @ $99.57
  • 5/24/2007: SELL 18 shares @ $112.63
  • 5/31/2007: SELL 15 shares @ $120.84
  • 6/22/2007: BUY 25 shares @ $124.06
  • 6/25/2007: BUY 25 shares @ $124.58
  • 7/2/2007: SELL 25 shares @ $121.08
  • 7/5/2007: SELL 29 shares @ $130.75
  • 11/07/07: SELL 18 shares @ $190.40
  • 1/09/08: BUY 22 shares @ $171.73
  • 3/05/08: BUY 10 shares @ $122.60
  • 5/1/08: SELL 7 shares @ $179.46

Trading Summary:

  • Average buy price: $127.07
  • Average sell price: $139.16
  • Realized gain from sale of 83 shares: $1003.82
  • Unrealized gain: 61 shares @ $184.73 each: $3517.46
  • Trading commissions paid: 11 trades @ $12.95 each: $142.45

Analysis

In analyzing the moves I have made in Apple, I came to the following conclusions:

  • Too many trades – Early in my position building of Apple, I would buy and sell, then buy and sell again. Not only did this incur excess trading costs, but it shows I was very indecisive with regards to investing in Apple. I clearly did not do the proper research and make a solid decision whether or not to invest my money with Apple.
  • Buying opportunities – One of the most important principles of investing, and one I talk about at length on this blog, is the concept of finding buying opportunities. Finding the right buying opportunity for your investments can make a huge difference in return. Such a skill is one of the primary factors with regards to Warren Buffett’s success. With the exception of the buy on January 9, 2008 at a share price of over $171, all other buys seem to have been decent entry points. At this point, I don’t think Apple is a good buy. I will be adding to my position on any pullbacks, especially if the stock breaks the $150 mark.
  • Selling when the stock is overbought – The sell at over $190 a share in November of last year proved to be a great sell. The stock seemed to be getting overhyped and overbought, so I decided to raise some cash. This was strictly a play based on stock activity, as I still had complete confidence in the long term potential of Apple. My recent sell at just under $180 was also to simply take gains as the stock has had a recent huge move up from its lows. If the stock hits $190, I will probably sell another chunk. I think the stock will continue to climb until Apple releases the much anticipated 3G iPhone (rumored to be in June).

Lessons To Learn

  • Do your proper homework and make your decisions with conviction. Don’t move in and out of stock in a short period of time like I did at the beginning of the above chart.
  • For most long term investments, you don’t want to sell your positions unless there are special circumstances. Apple, like other momentum stocks, tends to have high volatility and has overreactions both to the upside and the downside. The above trading demonstrates my attempts at taking advantage of such overreactions. Overall, I was fairly successful. The great thing about these momentum stocks is that buying opportunities will definitely present themselves. Be patient and wait for the right buy.

19 Comments »

  • David said:

    You’ve not accounted for your having to pay taxes on your gains while trading in and out of the stock. I have owned Apple for a a couple of years now, I owned it at $200 and I bought more all the way down to $121.37 and have watched it climb steadily back up to $180 making more money than I would have if the stock held steady at $200. Of course, if I sold at $200 I could have bought MORE at 121.37, tons more. But that is hindsight only, with perfect timing.

    I wonder how you would have done, after taxes, if you simply held your position and added to it rather than trading in and out of it and paying commissions and taxes.

  • David said:

    Actually, I think I can answer my own question. If you held on to your original 33 shares and then added the extra $3000 investment made on 6/25 and held on to that, you’d have come out ahead.

  • Mark said:

    With all respect, I think your result is sub-par considering how well Apple has done. Definitely due to too much trading.

    My own trading history in Apple is not something I’m proud of, but still quite a bit better:

    06-Jul-2006 +20 shares @ $58.06
    27-Dec-2006 +15 shares @ $78.26
    09-Jan-2007 +10 shares @ $91.28
    19-Jan-2007 +10 shares @ $91.00
    09-May-2007 -20 shares @ $106.26
    16-Aug-2007 +10 shares @ $113.50
    08-Feb-2008 +1 Jan09@210 call @ $4.90
    21-Apr-2008 -1 Jan09@210 call @ $13.30
    Used the realized profits of the call to buy 5 shares @ $167.95

    Position: 50 shares at an average cost of $69.40 (I considered the 5 shares to be free)
    Money invested: $3,470
    Unrealized profit: $5,766

    The answer to what the best strategy is seems to be: buy on dips and don’t sell! What also helps is trying to calculate a fair value, it takes out a lot of guess-work when the stock dips, you wouldn’t be selling at $125 and buying at $170. That’s what I did when I was so stupid to sell at $106 only to see it soar, I sat down and calculated the fair value and came up with $140. Right now I’d peg it at around $170. But I’m not selling, simply waiting for that next dip.

    Lastly: if the transaction costs bother you, get a low-cost broker. All my transactions cost $1 each.

  • kevin duffey said:

    David, absolutely.. there is some over-trading in my example which is what i hope to avoid in the future. Luckily, much of this trading was within a Roth IRA so I can avoid capital gains.

  • kevin duffey said:

    Mark, your result is fanastic; I wish i got in on Apple so early like you did. I agree with your analysis of my record. Like i mentioned in the article, i was very unsure of my position early on and should never have sold so early.

    If Apple spikes to over $200 over the next month, will you still not take any profits? I’m a true believer in the long term but Apple can easily get overbought due to hype.

    Who is your broker?

  • pk de cville said:

    Mark,

    You’re getting close to something incredibly wonderful: Apple is a beast, just like msft and intel were beasts in their day.

    Apple will be a beast for at least 5 more years because of their incredible strategic advantages in marketing, retail, OS quality/maintainability, security, and corporate leadership.

    We know where Apple’s going long term AND we know it will be very volatile as it goes to 400, 500, and beyond.

    So, why not just buy and hold? Allow for some trimming at apparent tops and some adding at apparent lows.

    I’ve been buying and holding LEAPS since 2005 and it’s made me zillions (not kidding)! My typical pick is way out of the money LEAPS bought at $13 sold at $80 to $120. (I kid you not.)

    Apple is a beast and my family’s wealth has been enormously blessed by this beast.

    Make (long term) friends with this beast. I suggest you buy 2010 Leaps at 250 or higher and just hold on.

  • TK said:

    Hey- Thanks for sharing your analysis. You have mentioned that you sold some shares at $180 and would sell more at $190. And then you mention that Apple would keep to climb until the 3G is announced in June. Now all this in my opinion is contradictory. You see a stock if you think it’s going lower. You cannot recommend a sell because you are doing profit taking.

    I agree w/ your analysis that it has had a huge run so far and we might expect a pull back but you have to include the 3G release anticipation.

  • kevin duffey said:

    It is simply my guess that Apple will continue to climb until the 3G release, this may or may not happen. As Apple continues to trend higher, I like to take some profits. I don’t sell my entire position. Apple is a stock that I think overreacts both to the upside and to the downside. I differentiate it from other long term investments because of these overreactions. The long term fundamentals are in place, and maybe it makes more sense to buy and simply hold; however, I like to attempt to take advantage of overreactions. Thoughts?

  • Kris said:

    You would do better to invest long term in a few well managed and forward thinking companies that are poised for growth, like Apple. And don’t run scared when the manipulators on Wall Street undercut the stock.
    I started buying Apple in ’97 and stupidly sold off 40% back in ’05 when it wasn’t doing much. Shortly after, it doubled, split then tripled. Despite the dip early this year I held on and the subsequent rebound has me with nearly a half million (with about $32,00 invested). But I still think about how much more it would be had I not sold those earlier shares.

  • Tom said:

    I have broken all the rules and traded Apple options and leaps, stock and puts for a year. Five hours a day.
    In Feb the account was down to 8K. Today it is at 30+. In retrospect I have made too many trades to chase the bouncing ball.
    This week was typical not in the up/down but how it looks to me generally:
    Monday I was up 2,904, Tuesday I was up 1,208, Wednesday I was off 3,933 Thursday I was up 818. Friday I was down 4,700.
    Part of the problem that adds to the volatility in my account is my use of stops. I was killed by the 3 big downers in AAPL (and the broader market) in January that took my previous 2007 stake down from +72K to 8K. Each of these nosedives happened literally in 30 minutes away from the screen, so I have been over stopping from fear. I have often times taken profits from front of month calls and bought leaps, only to sell one or two 5 days later to get onto what I saw as a pregnant up move.

    I started this play when I lost my software firm and got very broke. This was the only thing I felt I could do to build capital in the short time frame- learn day trading and focus only on AAPL because of the unique opportunity to see their strategy and ability to execute- when much of the world couldn’t quite see it for what it was/is.
    I am 76 and still well but at times a bit stressed.

  • Mark said:

    Kevin,

    It definitely helped getting in earlier than you did. But that’s not all to it. During that timeframe I could have bought it for a lot more. If you look back you’ll see that (for once) I managed to be patient with most of my buys.

    Would I sell when it goes over $200? Well, I didn’t last time. The next time around there will be even less reason to do so. $250, maybe, not so sure. I’m willing to allow Apple to prove it can get 25% market-share for their Mac, in which case it’s hard to imagine what the upper-limit of the stock is. They may get bigger than Microsoft in terms of market-cap (if AAPL goes to $300).

    Instead I think it’s more fruitful to focus on Apple’s value. If things go well, this value will continue to go up. In the meantime I believe there will be that incredible buying opportunity every once in a while. Two, maybe three times a year. Just be patient and choose your moment.

    Lastly: my broker is Interactive Brokers.

  • kevin duffey said:

    25% market share for Macs would make $200 look extremely cheap. I agree with your point on focusing on Apple’s value.

    What other stocks are you dialed into besides Apple?

  • Mark said:

    Apple is by far my favourite company. And it happens to be a good stock to follow.

    I have a few more good ones but I’m hesitant to list them. I’m a beginning investor and not an analyst or expert. So I’ll name just one: Chesapeake (CHK). Bought a large stake at $32 and now sits at $55 and still has plenty of room to go up IMO. Extremely well-run company, sitting on a lot of gas-reserves that are not fully priced into the stock. Definitely one of my favourites.

    But do your own due diligence before buying 🙂

  • Mark said:

    Oops, I see you’re already following Chesapeake.

    OK, another one then. Dawson Geophysics (DWSN), also a NG play. Had a great buying opportunity just a few days ago but is already back to a point where I won’t be buying. Also an extremely well-run little company. And it regularly provides great buying opportunities to the patient. I buy at a PE of 15 and sell at PE 20. (More or less) I’ve made more money trading this one than with Apple.

    Happy hunting.