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Heed these rules before biting into Apple

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For most people, Apple mania means buying the company’s products and playing with them. But for us financial voyeur types, the fun comes from watching the lunatic lurching of Apple’s stock price.

You gotta love it. From the start of last year through its all-time closing high on Sept. 19, Wilshire Associates says, Apple rose 73.5 percent, becoming the most valuable stock in the history of capitalism and accounting for an amazing 12 percent of the return the entire 3,684-stock Wilshire 5000 Index posted during that period. Then came the fall, and by Jan. 24, Apple had dropped 36 percent from its high. During that decline, calculates Standard & Poor’s numbers whiz Howard Silverblatt, Apple’s stock fell by more than the entire market value of Microsoft, once the world’s most highly valued company. Great stuff for us voyeur types.

What can retail investors learn from observing these gyrations? That no matter how hot a company seems to be and how limitless its future, some ancient verities of investing still apply.

Let me offer you three of them.

Thou shalt not run with the herd, lest ye be trampled. For a while, Apple could do no wrong. Everyone loved the stock. But after it peaked, it could do no right in the eyes of Wall Street, where “What have you done for me lately?” is all that matters. When Apple was cooking, hundreds of mutual funds and institutional investors felt that they just had to own it, regardless of how fast its price had climbed, because it was such a big factor in the overall market. But when Apple lost its secret sauce, players felt compelled to dump it, regardless of price. How else do you explain that Apple, probably the most widely followed stock in the world, dropped 12 percent, or $40 billion, in just one day — Jan. 24 — the first trading session after its earnings announcement disappointed Wall Street?

So listen to the hoofbeats all you want. But don’t try to run with the herd.

Thou shalt not fall in love with a stock. Owning a consumer stock like Apple can become an article of faith: I love its products, therefore I will love its stock, and I don’t need to do any analysis. But that clouds your judgment. And if you are putting significant money into a single stock, you need all the clear-eyed judgment that you can get.

Apple makes a lot of money, has a ton of cash and is a very valuable company. But stock prices are about the future, not the present. Right now the company lacks a hot new product to goose sales, and its huge profit margins make it vulnerable to competitors willing to settle for less lofty returns. Can you spell “Samsung”?

There’s a possible precedent here: Microsoft was once a sizzling stock with a seemingly limitless future. In 1998, says Bob Waid, managing director of Wilshire Associates, Microsoft shot past General Electric to become No. 1 in stock market value with a 115 percent increase, then cemented its position with a 68 percent gain in 1999. In 2000 the stock fell 63 percent, and it has never recovered its boom-time cachet. Or its stock price.

Thou shalt not believe in the infallibility of a chief executive. For a while, not only was the late Steve Jobs considered a god, but so was his successor, Tim Cook, as Apple stock soared when he took over. Everything Cook did, including instituting a cash dividend, was gushed over. Jobs died while Apple was ascendant, so his place in the investment pantheon is secure. Cook, by contrast, has had one of the quickest trips from Wall Street penthouse to outhouse that I’ve ever seen. Is he a good chief executive? Too early to tell. Is he infallible? Nope, no one is.

Owning individual stocks is much more fun than buying index funds, the prudent (but boring) way to invest.

I own quite a few stocks, Apple not among them, and sometimes have foolishly ignored these three verities. But if I were to put more than play money into Apple shares, I’d follow them faithfully. So should you. 

Sloan is Fortune magazine’s senior editor at large.

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