Basics From The Best: Icahn's Apple Stake Offers A Good Lesson For New Investors

 Last week Carl Icahn made a big show of declaring his continued support for Apple CEO Tim Cook. As the tech giant’s market capitalization crossed the $700 billion mark — a record for any company — the billionaire investor accused the market of undervaluing the stock. In a letter addressed to his Twitter followers Icahn laid out a pricing model that deemed Apple shares worth $216 a piece, bumping his valuation of the company over $1 trillion.

Regulatory filings released Tuesday show Ichan holding 52,760,848 shares of Apple at the end of the fourth quarter, or about 20% of his stock portfolio as reported on his 13F—just like the quarter before. In fact Icahn has not added to his Apple holding since the first quarter of 2014 when he bought 19.6 million shares. This was likely not a big surprise to folks who follow Icahn closely but to some of his more casual Twitter followers it may be more of a head scratcher.

Apple opened trading Wednesday at $127.63 per share with a market cap of around $745 billion. Icahn’s stake is currently worth $6.7 billion. Not bad. If Apple shares reach Icahn’s $216 mark — he was clear this is not a future price target but what he feels Apple is worth “TODAY” — his stake would be worth a whooping $11.4 billion. Again not bad.

But why wouldn’t someone with all-caps confidence double down? It’s not uncommon for professional investors to bet huge portions of their portfolio on their best ideas, but remember that they have different goals and time horizons — let alone spending power — than the average investor. At the same time the sheer volume of Warren Buffett quotes floating around the internet show that there is some everyday wisdom to be gleaned from even the most successful pros.

I emailed a few investing professionals to see how they would explain this to newbie investors. Here is what one of them had to say –

“No matter how large or small a portfolio is when you get to 20% or more, any slippage in that position can have a very negative overall effect so that should be a large consideration,” wrote JJ Kinahan, chief strategist in brokerage TD Ameritrade’s trading group. “Too often new investors are all in or all out and the pressure they put on themselves by having a large percentage or even all their assets in one stock too often just leads to bad decisions as every tick of the stock is a concern. It may not be possible to take emotion out of trading, but being over allocated in a product is one way that emotion will be a big influence in your trading and can overwhelm more solid rational thinking.”

Kinahan also explained that people buying individual stocks need to think about their buy, sell and hold ranges. Icahn, Kinahan figures, “had a price range at which he considered AAPL stock to be an attractive value. Once the stock traded above that level, not that he does not think it is still an attractive company, however, it does not meet his investment criteria for a new position.” Adding, ”This is good discipline and being disciplined to your rules is a key in success.”

Source: Forbes