No. of Recommendations: 58
Every once in a while, Yoda raises the periscope from the cave to take a look at the investment landscape as it appears to many other investors. METARites are well aware of the sustained outperformance of Apple (AAPL) since 2008 and the subsequent fall since September 2012. I was peripherally aware that AAPL had become the one, “must own” stock during the rally. It was the largest holding in many “momentum” based hedge funds. It dominated the NASDAQ 100 since the index is market cap weighted. It was big news when it became the largest company in the world based on market cap, by passing up Exxon (XOM).

What I was NOT aware of was all of the hoopla and media attention that AAPL drew on a daily basis. This is what I missed by NOT watching CNBC/MSNBC/Bloomberg. In hindsight I have learned that AAPL bulls and bears regularly debated their cases in the media. For many years, the bulls won the debate.

In the run up of AAPL, one analyst stood out. He consistently had the most accurate earnings/sales forecasts. He also seemed well tapped in and had accurate product announcement forecasts. He became a guru on the way to achieving “god like” status. Very impressive for a 33 year old with a new law degree. He was self trained at investing and did not work for a Wall Street firm.

Andy Zaky had developed such a following, he decided to start an Internet pay advisory service on AAPL called Bullish Cross Pro. It was a big hit and very active with over 700 paying subscribers @$200 per month. He then opened an AAPL only hedge fund. Pretty interesting concept that you could and would entirely base an investment fund on a single company. The minimum investment started at $250k and then went to $500k. 28 investors signed up.

By now, you can imagine where this is headed. Andy must have dropped his AAPL crystal ball in 2012. His ability to forecast the direction and magnitude of AAPL stock went away. He totally missed the downturn. This would have been fine if he was a long only investor in the hedge fund. Even if you bought AAPL @$700, you could still hold it today assuming you had not leveraged it up. Unfortunately, Andy had used leverage and options betting AAPL would continue to rise. He managed to lose 50% of the funds capital in one month. By November 2012, the fund had a NEGATIVE net worth. Investors had suffered 100% losses, not 99.99%, but 100.00000%.

Fortune Magazine has a great, MUST READ IMO article detailing the story: [1]

An excerpt:

But those lost millions -- suffered largely by well-to-do investors who knew the risks they were taking -- pale next to the damage done to the 700 subscribers at Bullish Cross Pro. Many of these investors have since fled the site and joined a Google group called bc-subs (for "Bullish Cross subscribers"), where they commiserate about their lost retirement funds, their ruined marriages, their thoughts of suicide. Many lost hundreds of thousands of dollars. Some lost millions.

"A significant number of the people who lost money following Zaky's trades were people who were not sophisticated enough to understand the instruments in which they were investing," says one member who asked not to be identified. "Early on, Zaky had made recommendations about not putting more than a certain percentage of one's capital into following his Apple positions, but most people ignored that."

"I fell in love with this punk kid," recalls a 40-year-old freelancer who converted shares she had purchased at $90 into the call spreads Zaky was recommending. "He was cool. He wasn't ************. He made sense."

But things got out of hand in October, when Zaky became convinced that Apple was set to rally. "At some point he lost it. When he said hold on to our spreads, I was losing $25,000 a day. I froze. I couldn't sleep."


1) There are NO infallible investment gurus. (Excepting one or two nameless METARite posters, Yoda not included.) If you think you have found an infallible investment guru, HIDE YOUR CHECKBOOK. You are likely suffering from a bought of delusion. Hopefully it will self cure. If not, I am sure they make a pill that will help.

2) YOU MUST DIVERSIFY no matter what you think about a single investment thesis. Last year it was AAPL and Facebook. There is always a “must own” stock of the day club. Only problem is that the names change on a regular basis. Think dotcom’s in 2000. Think “Nifty 50” in the 1960’s. Maybe it was General Motors. I don’t care how confident you are, you should have a rock solid MAXIMUM allocation to any single stock. Many people recommend a 4% to 5% limit, which I think is reasonable. If your allocation rises above that percentage, you MUST rebalance to lower the allocation.

A few years ago, I was asked to review an “investment portfolio” for a family. Lots of different investments spread out over different brokerages. After compiling all of the data I discovered that about 75% of their financial assets were in a single stock. Blue chip, AAA, been in business a gazillion years, steady dividend payer etc that all METARites know. The family had owned it something like 40 or 50 years. I was emphatic they had to diversify this down. Under duress I agreed they could keep 25% of their portfolio in the stock. Unfortunately, they did NOT take any action and the stock suffered a catastrophic loss, and yes this was before the 2008 crash. It was an eight figure loss and ranks as the second largest investing mistake Yoda has ever made in dollar terms. And yes, it was Yoda’s fault the family did NOT diversify it down. Yoda did not have the force with him to use better persuasive skills.

3) LEVERAGE can mortally wound a portfolio. If you are using leverage, whether it is on common stocks, option and/or futures, you MUST have loss limits of some sort. You can argue it is OK to NOT use limits if you have an all cash, non-leveraged portfolio. Like I mentioned above, even if you bought AAPL @$700, you are still solvent if you did NOT use leverage. (I am not going to go off into an argument about using loss limits in non-leveraged portfolios. A topic for a separate post.)

4) HUMILITY is vital to long term investing success IMO. You MUST have the ability to recognize when you make mistakes. Hopefully you will learn something and NOT fall into the same trap again. If you do NOT learn, you will likely fall into lots of other traps. Often times, the market will clearly show you who is boss. You might have the perfect scenario. You might have the perfect understanding of the business. You might have a good handle on the macro situation. The late Marty Zweig said it best: The trend is your friend. Financial autopsies are vital IMO.

Yoda has not owned APPL in any widows and orphans portfolios EVER.
Yoda had never heard of Andy Zaky until this week.



[1] Fortune article: The Rise and Fall of Andy Zaky
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