The Huge Mistake Apple Investors Are Making

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Yesterday, Apple (NASDAQ: AAPL  ) shares briefly fell below the $400 mark, dropping to their lowest levels since late 2011. Yet before you fall prey to the mad media frenzy that the milestone-breach created, step back and remember that every analyst, news source, and other so-called expert that drew any huge conclusions from Apple's short-term movements was guilty of making a simple mistake: anchoring their views on the stock to a particular price.

The meaninglessness of $400
Anchoring is a common practice among investors. Whenever you draw an arbitrary line in the sand for a particular financial metric such as a stock price or index level, you're anchoring your perspective on that stock to your chosen number, even if it's based on nothing other than psychology. Anchoring reflects the behavioral need to try to take the chaos of the stock market and draw seemingly orderly conclusions, even if they're based only on the initial arbitrary anchor.

Of course, the more people anchor to a particular figure, the more important it becomes to the overall psychology behind the stock. For instance, many investors pay close attention to whether a stock's price is above or below what they paid for the stock. Yet most of the time, since every investor paid different prices for their particular shares, my anchor will bear no resemblance to your anchor, making them largely irrelevant as a predictor of group behavior.

By contrast, sometimes big groups of people come to the same conclusions and anchor to the same level. That happened with Facebook (NASDAQ: FB  ) in its IPO, where $38 per share still represents a huge line in the sand based on its initial offering price. If enough people decide that Facebook hitting $38, Apple falling to $400, the Dow hitting a new record high, or gold dropping below $1,400 per ounce represents some sort of special turning point, then what happens at those levels can turn into a self-fulfilling prophecy.

What's really important
To avoid making mistakes based on anchoring, it's critical to remember that fundamental events rather than arbitrary milestones are responsible for changes in the intrinsic value of the companies you invest in. So if yesterday's announcement from Cirrus Logic truly reflects a drop in long-term demand for Apple's products, then its decline may be justified, even if the coincidence of its decline to $400 is irrelevant. If Facebook can monetize its mobile platform and build profit, then climbing from current levels to $38 per share may be just a stepping stone to even larger future gains. If stories that Cypriot central bankers may need to sell off bullion reserves prompted investors in SPDR Gold (NYSEMKT: GLD  ) to dump their gold holdings and flood the market with a glut of supply in the face of weak demand, then the big decline in gold prices earlier this week makes perfect sense. But don't make the mistake of thinking that the particular levels they hit along the way are necessarily an exact reflection of those fundamental changes.

Experienced investors are constantly on guard to avoid emotional responses to market movements. Being aware of the temptation to anchor on meaningless metrics will help you avoid making false conclusions from them.

Get the latest on whether Apple has become an amazing value or a deadly value trap. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (6) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2013, at 2:51 AM, alboy5 wrote:

    Sell iappl when its $39.20.

  • Report this Comment On April 19, 2013, at 2:52 AM, alboy5 wrote:

    I meant sell aapl when its $29.20

  • Report this Comment On April 19, 2013, at 1:27 PM, dwilh51183 wrote:

    AAPL is on sale! LIKE 90% OFF.

    I'm buying more and plan on selling when it hits $900.00 LATER THIS YEAR.

    This is the greatest American company with 155 billion in cash and GROWING LARGER EVERY DAY

  • Report this Comment On April 19, 2013, at 2:15 PM, Jjkiam wrote:

    Yes Apple may have been great but current management couldn't possibly have done a worse job either responding to the chorus of concerns growing louder every day that question Apple 's viability OR undertaking any meaningful efforts to act in a fiduciary manner for shareholders. This collapse began over 7 months ago and everyone is tired of waiting for this CEO or Board to actually make decisions and lead!!! Wow what a concept ! Tim Cook is a complete failure as a CEO! I can't imagine that the big shareholders are going to stand by and let his indecision destroy the company and their holdings in it.

    There will be a major shareholder revolt that replaces the equally incompetent members of the Board as well as TC. This will happen by the end if June

  • Report this Comment On April 19, 2013, at 9:32 PM, BillFromNY wrote:

    As an engineer who used MacDraw on one of the first hard drive-less Macs off the line in 1985 for an RFP, but who never considered investing in the stock until now, my question is, what becomes of the 100 billion plus cash dollars in the bank?

    Will more of these dollars find their way to shareholders?

  • Report this Comment On April 21, 2013, at 9:03 PM, somethingnew wrote:

    That's the billion dollar question. I would say as long as Apple keeps their cash flow booming they will eventually start returning more of that hoard to their shareholders. If they consecutively report declines in earnings or start reporting losses then they will either hold on to that 100 billion for dear life or use it to invest in new products.

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