A common saying among portfolio managers is: "Time in market is more important than timing the market." This means that the best way to reliably grow your capital in the financial markets is to leave your investments in place, and not attempt to boost your earnings through trading. Of course, this only works if you choose the right stocks...
One of the best stocks anyone could have chosen is AAPL. Even investing in the company as late as 2012, you could have made incredible returns. For example, $1000 invested in Apple in August 2012 would now be worth $8,480.20, assuming you consistently re-invested the dividends.
The reinvestment strategy would have resulted in a 23.87% average annual return and a cumulative return of 748%. On the other hand, if you had chosen not to reinvest your dividends in the stock, the total return would have been 580%. This shows the power of compounding interest over time, which is one of the main arguments for staying invested in the market. Even Apple's modest average dividend yield of 1.6% worked wonders over those 10 years.
An investment in Apple would have beat the the S&P 500 by a wide margin. With dividend reinvestment, the index would have returned 338%, leaving you with $3390.56. This amounts to an average 13% annual rate of return. Here too, we can clearly see how much the reinvestment of dividends can help performance, since the index strategy would have returned "only" 199% without the regular reinvestment of dividends.
Apple's beta is 1.18, meaning that it is roughly 20% more volatile than the S&P 500, and with a R squared value of 0.48, roughly 50% of its movements are correlated with the benchmark. AAPL's alpha -- meaning its annual outperformance of the S&P 500 benchmark beyond what would be expected from its beta -- was 10,56% over the last 10 years.
Apple's trailing 12 month price to earnings (P/E) ratio is 28.4, based on its trailing Eps of $6.05. The company has a forward P/E ratio of 26.7 according to its forward Eps of $6.44. This is higher than the average valuation of US technology companies, which on average have a P/E ratio of 20. This goes to show investors are willing to pay a premium for the stock, expecting the future performance to be as impressive as its past performance.
Of course, we all know that past performance is no guarantee of future results. But investors must always make some assumptions when choosing a stock, and past performance and benchmark comparisons are usually factored into these decisions, even by seasoned portfolio managers. The key is to keep track of your assumptions and to adjust them as necessary to meet changing circumstances. For now, AAPL is king of the hill, but who knows how long its reign will last?
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