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Jim Cramer’s Warning To Traders About Apple Stock

Jim Cramer’s stolen Watch episode helped him to understand one thing about Apple’s business and its stock. He then offered a warning to traders who try to time entries into Apple shares.

Jim Cramer thought he had his Apple Watch stolen. Although the device seems to have been safely in his possession all along, the event caused TheStreet’s and Mad Money’s star to have an epiphany about the appeal of the Cupertino company’s business and about Apple stock itself:

There isn’t anything I don’t do [on the Apple Watch]. My Watch has become part of my routine. I think the ‘lukewarmers’ on Apple truly do not get what Tim Cook has done: create indispensable appendages.

It may not have happened immediately upon the launch of the original Apple Watch. But Jim is correct: the device has evolved from a mere peripheral to a stand-alone product of high quality that can do much of what a smartphone does, including connect to a cellular network and work independently from (but usually in sync with) other Apple gadgets.

What caught my attention the most about the “stolen Watch” episode, however, was Jim Cramer’s warning to traders about Apple stock:

If you try to trade [Apple shares], you don’t get in. You can’t be nimble enough to get out and get in. You just have to stay in, and you stay in because Apple makes products that are fantastic.

This is not the first time that Jim has said these words: buy, don’t trade Apple. But the advice is so compelling that it is worth repeating frequently – even more so now that Apple shares trade at sky-high valuation multiples rarely seen in Apple’s history as a public company (see graph below).

AAPL Key Valuation Multiples Since 2009

AAPL Key Valuation Multiples Since 2009

History says: don’t time entries

Evidence that helps to support the “own, don’t trade Apple stock” argument is depicted below. The histogram shows the monthly distribution of five-year annualized returns on shares of the Cupertino company, going back to the early 1980s.

Here are some interesting observations:

  • in 86% of the cases, a 5-year investment in Apple produced positive returns.
  • in 68% of the cases, the investment produced annual returns above 10%.
  • in only 7% of the cases, the investment resulted in annual loss of worse than -10%.
Apple Distribution of 5-Year Annual Returns

AAPL 5-Year Annualized Return Distribution since 1980

On the other hand, traders that have chosen to jump in and out of Apple stock have had a much tougher time.

Volatility in Apple shares has been historically high, at 45% annualized since the IPO. In other words: long term share price movements have been consistently bullish, but short-term behavior has been very erratic and unpredictable.

The bottom line: own it

Based on historical observations, it matters little when an investor chooses to buy Apple stock. Given enough time, shares rise, and the investor’s capital tags along for the ride. Staying on the sidelines, waiting for “the right time” to jump in, has often resulted in opportunity costs, not in superior results.

Of course, past performance is not a guarantee of future returns. Should Apple stock enter a secular decline or “malaise” rarely seen in its four decade-long history, owning shares for the long haul may not be as profitable as it has been in the past.

But if Jim Cramer is right, and Apple continues to deliver essential tech products and services that are in high demand even at their premium prices, the chances of such bearish action lasting long are low, in my view.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)