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Kent Thune

Apple vs S&P 500 (Or When Momentum Investing Doesn't Work)

By January 25, 2013

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Without looking at the historical performance data, most investors would guess (and be correct) that Apple stock (AAPL) has vastly outperformed S&P 500 Index funds over the long-term. But the underlying story here is that the vast majority of individual investors have knowingly or unknowingly engaged in a type of momentum investing with Apple stock. In different words, a large number of do-it-yourself investors have recently been burned by Apple's fall.

Apple's Performance vs the S&P 500

If you are among the extreme minority of investors that bought Apple in the 1980's, you have enjoyed more than a 10,000% total return. For some perspective, a 10,000% return on $1,000 is $10 million.  That makes retirement savings simple, to say the least, right?

However, the vast majority of investors owning shares of Apple stock in recent months did not buy in the 1980's; they jumped in along with the crowd sometime within the past year or two as the stock price doubled and tripled.

Check this comparison between AAPL and the S&P 500 (data from Morningstar, as of January 24, 2013):

  • 3-month return: AAPL -26.54% vs S&P 500 6.75%
  • 1-year return: AAPL 8.42% vs S&P 500 16.29%
  • 5-year return: AAPL 27.44% vs S&P 500 4.33%

Over the past 3 months, AAPL lost nearly one-third of its share price while the S&P 500 gained an impressive 6.75%.  Over the past year, the S&P doubles that of AAPL (who would have imagined that?).  But the long-term picture still paints Apple much brighter than other large-cap stocks.

The question is: How many investors were investing on momentum and bought shares of Apple in the last year? I don't know the answer to this but I am confident the number is much higher than those who bought shares 5 years ago or more.

Perhaps the lesson here is that even the unimaginable can happen.  The trend is not always your friend. Is Google (GOOG) next?

Comments
December 14, 2013 at 3:33 pm
(1) Bank Life Insurance says:

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