I tend to be a contrarian buy and hold investor. To illustrate this, let me tell you a recent story about an interaction I had with another investor with a different philosophy. I have a friend who is conservative and keeps his excess profits in “safe” instruments like money market funds. He invests mostly in real estate, and his set rules are to sell when the investment goes down 10% to prevent further losses and sell when the investment goes up more than 20% to protect the profits.
We were eating lunch together last year and I mentioned how I thought Apple Inc. (NASDAQ:AAPL) was going to be higher than it was six months later. Of course we all know that I got to eat my words, but I thought that maybe this wasn’t such a bad thing.
At the time, I had put about 20% of my portfolio into Apple shares. I also bought calls with March and June strike dates using about 1% of my portfolio. Given Apple Inc. (NASDAQ:AAPL)’s chart 2013 has been very cruel to me. Was I Foolish or simply foolish?
I’m good at seeing trends, but terrible at timing them. I got burned by using options contracts and should have hedged my bets by buying puts, but I’m a newbie to that game and prefer to learn lessons the hard way. Why am I celebrating then?
The difference between my friend and me is time horizon. I am in my mid-40s, with 20-25 years of earning potential in front of me. I can afford to lose 10-20% or even 30% of my portfolio because my time horizon is very long.
My friend is in his early 60s. He needs to be more conservative with his money since he will be needing it soon. He is doing very well by getting an average of 9-10% returns. I didn’t mention his buy rules, but typically he invests in private real estate deals.
I tend to invest in more liquid investments such as exchange traded funds (ETFs) and publicly traded stocks. I buy and hold as a rule, but my sell rules are more flexible. I really don’t have the sell discipline he has.
Going back to Apple Inc. (NASDAQ:AAPL), Mr. Market is shunning Apple. This has happened to the company before. In 1997, I took a leap of faith and invested when the company was selling for cash at hand. I was richly rewarded for that investment, but are things different now that Steve Jobs has died? I have no special knowledge of the inner workings of Apple, but I do trust Tim Cook. The hope is that he is competent enough to lead his team to build great new products.