December 11, 2012 | Back to: News

Market Pulse: Thoughts on extremes

INCLINE VILLAGE, Nev. - Last week, Apple Computer fell 9 percent and is now 24 percent below its October high. In short, the stock has been clobbered. In October, Wall Street analysts gushed over Apple, which had a meteoric rise as it introduced new products.

Some raised their target price to $1,000, $1,500 or even $2,000. Investors chased the stock ever higher. But that was then. Investors who loved Apple at 720 and acted as if it would rise forever love it no more at 525. We've seen extremes before ... many times.

In the late 1960s and early 1970s, investors bought computer leasing companies, mobile home manufacturers and fried chicken franchisers as if simply having those words in their names guaranteed success. On more than one occasion they chased companies with "oil" or "energy" in their names even though they often had yet to drill a well.

The manias soon ended and few if any companies survived. In the late 1990s it was the dot.com companies. They raised money, bought a Super Bowl ad ... and soon closed up shop.

The big names in technology suffered, too. Cisco reached 77, Microsoft 60, and Intel was in the 70s. All were grossly overpriced and soon collapsed. More than a decade later they are still far below their highs, in fact far closer to their lows. That shows how extreme prices were.

Investors go to extremes on the downside as well. In March of 2009, amid the financial crisis, they sold some of America's largest companies as if their very survival was at stake. International Paper fell to 4, Dow Chemical and General Electric each fell to 6 and Wells Fargo touched 8. IP, Dow and GE have since soared. Wells is now 33. In the 1987 crash we saw similar extremes and mindless selling.

Back to Apple. Will it collapse? No. Now most everyone is assuming Apple's glory days are over. Because it has moved lower they now assume it will move lower still.

Apple is one of the world's great companies. But there are great companies and great stocks and the two are not necessarily the same ... at least not forever. Apple has been a great company for years, and for a few years a great stock.

But to act as if a dramatic price trend, whether up or down, will continue forever is inevitably a mistake. More often than not, going against the trend is the smart move, selling into a mania or buying in a panic sell-off. That is especially true when the moves are extreme. We've seen that many times, most recently with Apple. We'll see it again.

- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.

David Vomund
Special to the Bonanza


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Tahoe Daily Tribune Updated Dec 11, 2012 07:37PM Published Dec 11, 2012 07:35PM Copyright 2012 Tahoe Daily Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.