I read this article on USA Today earlier this week about Apple stock. Basically a reader sent in a letter asking if he could have Apple pay for a new iPad by investing $10,000 in Apple stock and using the gains to buy a new iPad in a few months.
Are you kidding me? I am a huge fan of Apple and the stock has been on an amazing run. But it is currently close to an alltime high and it has the largest capitalization of any company on earth of nearly $600 billion. This reader wants to eek out a 7-8% gain so he (I am assuming it is a guy) can use the gain (net of taxes) to buy a new iPad.
Let’s just look at Apple’s stock performance in the first quarter. If you had invested $10,000 in Apple stock on December 31st 2011 and cashed out at the end of the quarter you could have afforded to buy yourself six iPad’s even assuming a large tax bite on your gains. What’s not to like?
This flies in the face of pretty much every piece of investment advice you will ever read. So I am surprised not just that USA Today printed the article but gave the question fair consideration. At the very end of the article the author did provide a caveat that this may be a risky proposition but he also said those fateful words: “maybe this time is different”.
Owning one individual stock, even if it is Apple, is about as risky as it gets when it comes to investing. In the next three months Apple’s stock could indeed be up 8% or it could be down 10% and no one, not even the ghost of Steve Jobs, knows which one of these scenarios is more likely.
A Better Idea Than Investing in Apple Stock
Here is an idea for this reader. Invest $10,000 in Lending Club or Prosper. Take a medium risk portfolio with an average interest rate of around 15% or so. Invest across 400 notes so you are well diversified with $25 per note. Then wait for the payments to come rolling in.
You don’t even have to wait until you get the 8% gain – you will have enough of your money back to buy your iPad within three months. Of course, some of this will be principal and some will be interest but, hey, this guy is in a hurry.
A new iPad costs $499 for the base model. If you earn 8% on your $10,000 and you will be able to buy yourself a new iPad every year with the p2p lending gains realized even taking into account the impact of taxes.
And with a well diversified portfolio it will be unlikely you will ever lose any principal. The same cannot be said for owning Apple stock.