AAPL: A Cautionary Tale

It should be obvious by now that it can happen to anybody.

AAPL is down almost 40% from its highs last year and is probably headed lower (see previous post on the stock price going to at least $350).

But why? It continues to operate as THE the premier technology/consumer products company on the planet and will continue to innovate and deliver unique and popular products to the marketplace. Will it make mistakes along the way? Sure, but hopefully none big enough to derail the long-term success of the company. The problem is that when the market starts to assume that nothing will ever go wrong - that the good times will always roll - people start to worry about missing out. So, the stock price begins to accelerate, analyst opinion becomes lopsidedly bullish, ludicrous price targets emerge (think $1111), and you've got the makings of an overvalued stock destined to disappoint. Well, here we are. It should have seemed so obvious at the time, but "investors" who should have known better got caught up.

And here's where the lesson emerges. We as investors need to be asking ourselves the following:

If it can happen to AAPL, who else can it happen to?

And the answer is anybody. And if it can happen to anybody, it can happen to everybody. It can happen to the market as a whole. The herd can become so caught up in stock indices at multi-year highs, reaching meaningless "psychological" round numbers on stock indices, that it fears missing out. Again, stock prices reach new highs, bullishness becomes rampant, bearishness falls by the wayside and index price targets get higher and higher. Realists are dismissed as fear-mongerers. Chatter begins that we're entering a new secular bull market.

Really?

Nevermind that valuations based on normalized earnings are higher than almost 90% of recorded levels over the last 130 years. Nevermind that the dividend yield on the S&P 500 is lower than when most other secular bear markets have started, or that profit margins way above average. Things are different this time. The Fed won't let us down. The economy is recovering. Debt and deficits don't matter. Profit margins won't revert to the mean.

Don't look now, but here we are again, jumping both feet into a market sure to disappoint us down the road. When? No one knows, but when it happens (and it will) it will seem so obvious in hindsight that we shouldn't have taken the risks that we did.

So let AAPL's recent stumble serve as a cautionary tale - it can, and will, happen to anybody, even an entire market.