A few months ago, I bought some shares of Apple stock. Being new to investing and not wanted to risk too much, I only bough a couple of shares at an initial price of $461 for a share.
During this time period, Apple had not even announced the release of the iPhone 5s and 5c, so the shares were still trading at a pretty low price. Following the announcement of their next generation of phones, shares shot up to $500 a share, and I was pretty happy with myself. I made a good stock pick which went up $40 and was looking to climb higher.
Not long after, shares began to drop again. Because sales of the new iPhone in China didn’t meet expectations, the share price dropped. They dropped to as low as $550 dollars, and I started to get uncomfortable in my Apple stock position. When shares came back up, I sold my stock at $465 for a meager gain of $4 per share.
Two weeks later, I realized I made a big mistake, and ended up buying a couple more shares of Apple’s stock at $478. I’m still holding those shares at the moment which are currently priced at $633. What mistakes did I make that I want to pass on to you?
1. “Invest in great companies at good prices”
The situation with Apple was a perfect representation of Warren Buffet’s quote above. Apple shares were trading at a very low price. The price-to-earnings ratio was only around 12. Compare that with the S&P 500 which averages around 15 and is currently at 19.2 as of May 31, 2014. Apple was trading at a bargain at the time, and is still at a very cheap price. Considering the brand and the great products Apple puts out, you would expect their PE ratio to be much higher. This is a sign of a stock that you want to keep in your portfolio and hold on to for a while.
2. Don’t be affected by daily fluctuations, meaningless news surrounding the company, and investor expectations and fears which make stock extremely volatile in the short term.
I sold my Apple stock because I was reading too much news about the stock and let other people’s opinions about the stock price influence my investing decision. Instead of trusting my research and my own judgment, I let other’s judgment scare me into selling my stock. I knew the stock was selling at a bargain, but I was more influence by what was happening on a short time frame. Apple’s stock jumped up $40 and subsequently dropped $50. I panicked and sold the stock for a meager gain because I didn’t want to lose money. Trust your judgment and research.
3. Have a long-term horizon when investing in great companies.
You are not going to make a bunch of money quick by investing in great companies, but you can get returns which can potentially beat the market. People who make money on short-term investments are more so lucky than anything else. Use a long-term approach, and invest in great companies which are undervalued. Chances are, the share price will bounce back up and you will make some nice gains as a result. Just look at my position in Apple’s stocks. They have jumped up 32% since I rebought shares, and I couldn’t be happier.
Learn from your mistakes and don’t let the market decide what the value of your investment is. If you own a home, do you call your broker every day to see what the value of your home is? If someone offered you a low-ball price on your home based on the price your neighbors were selling their home, would you take it? Probably not, because we don’t live in homes with a short-term outlook. Why should you with your stock positions?