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(B)(N) AAPL Apple Computer Inc

August 27, 2012

In the (B)(N) model of the Perpetual Bond, we only buy or hold a stock in our portfolio if the Stock Price (SP) exceeds the Risk Price (SF). Period. End of Story. SP>SF or else. But that simple rule leads to some interesting decisions that a portfolio manager might have to make from time to time and the current rather exciting case of AAPL Apple Computer Inc (S&P 500 NYSE) provides some good examples and object lessons of  “SP>SF or else”.  It is, of course, our preference that no “decisions” (circumspection or circumlocution that amounts to “gambling”) should be required at all when we are dealing with the hundreds of companies that we routinely include in our portfolios but “investing”  isn’t always that simple because “investing” is “the purchase of risk” and, therefore, the purchase of “excitement” for those who don’t know “the price of risk”. Please see these Letters, The Price of Risk, August 2012.

Exhibit 1:  (B)(N) AAPL Apple Computer Inc – Price Chart

 

The chart (Exhibit 1) shows the daily high and low stock prices for AAPL from early 2008 through the present (Dark Line with Grey zone below showing the daily price volatility). The “Risk Price” (SF) is calculated independently of the stock prices and depends only on current generally available balance sheets which are often times several months out-of-date to the current date. In general, that doesn’t matter because there’s really no material reason for the stock price to change absent information that becomes generally available and absent fraud or special cases such as an acquisition, merger, or bankruptcy event. Stock prices, however, can be observed to change quite frequently and we have nothing to say about that because it reflects the daily buying and selling activity and diverse motivations of thousands of investors.

The “Risk Price” (SF) is, therefore, a step-function that can be expected to change only once a quarter or every three months or so (the Black Line step-function on the chart). The Stock Price (SP) at which we bought or held the stock is shown as the Dark Red Line which is also, nominally, a step-function, although new stock prices are available at every minute of every day and might affect the prices at which we are able to buy and sell the stock.

Our “rule”, then, requires us to buy or hold the stock between (roughly) $140 in the third quarter of 2009 (2009Q3 and Red Line (SP) above the Black Line (SF)) and to “sell” at $350 in early 2011 (fifteen months later and Black Line (SF) above the Red Line (SP)).

“Selling”, of course, is a discipline and if we have no need of cash or new opportunities in other companies for which SP>SF with greater clarity, we can “sell” the stock by buying a forward put option at the current price ($350) and partially offsetting the cost of that by selling an opportunistic call at a much higher strike price (for example, $380) and similar duration. If we’re “called”, that’s all to the good (at $380) and the worst outcome is that we will get our current price, or more, several months later regardless of what happens to the stock price in the intervening time. And, of course, anything could happen because the stock is trading in (N) which can be accurately described as the “volatility zone” of investor uncertainty and, indeed, for the next year, AAPL traded in a relatively volatile zone of $320-$350-$420 before “running” from $400 at the end of 2011 to the current $620 and rising eight months later. During all of that time, the risk price (SF) continued to increase and it is only recently that we are again confronted with the fact SP>SF and we might consider buying the stock if that evidence continues to obtain. Other than that, we just don’t know the future and have no idea what the price of AAPL might be then.

For more information, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used.

At the present time (August 2012) there are about two hundred companies in the S&P 500 NYSE that are trading (B) and therefore may be included in the Perpetual Bond and about three hundred companies that are trading (N) and in the “volatility zone” for which the expectation is nothing. For more on that please look up “Contra Portfolio” or this post, NASDAQ 100 – (B)(N) There And Done That, June 2012.

These data may be obtained from us for free by simply sending us an email request at RiskWerk@gmail.com and consist of the three data files S&P 500 NYSE (B)(N), S&P 500 NYSE (B)(N) Risk Price and S&P 500 NYSE (B)(N) Stock Price in a machine readable format.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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