THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"I generally avoid temptation unless I cannot resist"---Mae West
2 The woman said to the serpent, “We may eat fruit from the trees in the garden, 3 but God did say, ‘You must not eat fruit from the tree that is in the middle of the garden, and you must not touch it, or you will die.’”
4 “You will not certainly die,” the serpent said to the woman. 5 “For God knows that when you eat from it your eyes will be opened, and you will be like God, knowing good and evil.”
6 When the woman saw that the fruit of the tree was good for food and pleasing to the eye, and also desirable for gaining wisdom, she took some and ate it. She also gave some to her husband, who was with her, and he ate it. 7 Then the eyes of both of them were opened, and they realized they were naked; so they sewed fig leaves together and made coverings for themselves.---- Genesis 3
Since Eve had her first date with Adam, temptation has been associated with the apple, and never more so than this week. Allow me to explain.
As the clock ticked toward the time for Apple's quarterly report (4pm EST July 19, 2011), I became progressively more interested in buying. As you may recall from Volume 75 ( http://riskrewardblog.blogspot.com ) I bought a position in Apple on July 7 and another on July 8, once it broke through the $350 resistance line. As day broke on the 19th, I had a premonition that Apple would blow through the market's estimates. Back in the day during earlier forays into investing, I would have acted on this hunch. But, purchasing positions in advance of quarterly earnings is anathema under my new, disciplined Risk/Reward approach to investing. As Squawk Box ended and I headed to work, the temptation intensified. By 10 am, I was online and bought three times my then current holdings. My ability to resist was no greater than had I walked into an ice cream parlor in South Haven or a tobacco shop inStrasburg. As the afternoon progressed, my guilt overtook me and by the close I sold off most of what I had purchased that day. Of course, at the market close, Apple reported blow out earnings and jumped $25 in after hours trading.
Although I forewent some excellent profits, I felt much better for having sold. Investing without discipline is a certain formula for disaster---believe me I know from experience having ridden the dot com bubble to the bottom.
But, how about that Apple! My God, what a company. It still is cheap even at $390, trading at a price/earnings ratio of 15 with a growth rate of 19%. This equates to a 0.8 PEG (price/earnings/growth rate), and any stock with a PEG below 1 is considered inexpensive. Indeed, Apple is such a great company, it cannot afford to dilute its earning stream by acquiring any other company. Its organic production and growth is simply to good--so good that it now is the second most valuable company in the world and is sitting on $76 billion in cash. To give some perspective to this hoard, understand that there are only 30 companies in the United States that are worth more than $76 billion. On his Wednesday telecast, Cramer increased his valuation of Apple to $500 per share. If Apple is not going to buy another company and if it refuses to pay a dividend (it could afford to pay a one time dividend of $80 per share!), then it should start investing in itself with a share buy back. Apple shareholders/cultists would love Steve Jobs even more, because even though Apple is the greatest company going today, its stock is not (as evidenced by its low PEG). Its stock has appreciated 50% in the past year, but given Apple's truly incredible financial performance it should have done much better. Frankly, one could have done nearly as well owning Chevron (53%), Shell(38%) or ConocoPhillips(46%) with their healthy dividends included. And our old friend gold didn't do badly over the past year either (34%) I will keep my Apple, but until the market becomes more confident in consumer spending, I fear this remarkable behemoth will not get its due.
Speaking of gold, I intend to buy more after the inevitable dip that will occur when (if) the US debt ceiling is raised, and the fear of a default in the world's reserve currency is abated. I will likely buy in mid to late August, in advance of the traditional increase in gold prices driven by the fall Indian wedding season and the celebration of Diwali in October. Even absent its "hedging" value as a response to currency devaluation in the US and Europe, gold would likely appreciate due to its ever increasing demand by the growing middle classes in India and China which accounted for 58% of all gold purchased in Q 1 2011.
As the furor in Europe subsides, look for some decent yields coming from European banks. In the future, these institutions will not be able to rely so heavily upon sovereign debt as a source of capital. Regulations are now afoot that would require Europe's major banks to raise $654 billion of additional capital (much of it equity) by 2019. I smell hefty dividends.
I am thankful that I overcame temptation. Although not handed to me on Mt. Sinai, my investing commandments are sacred--at least to me.
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