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Why now's not the time to sell Apple stock

If you own Apple stock, odds are good you bought it for the wrong reasons. Don’t sell it for the wrong reasons, too.

The tech giant’s shares have plummeted from a high of over $700 in September to around $521 today, driven by a worry that the iPhone 5 isn’t selling as well as initially anticipated, a shifting sales mix that tilts more toward lower-margin products and investors seeking to take profits before 2012 comes to a close.

For a while, there was nothing but love for Apple. It’s ubiquitous, cool and makes a lot of money — all of which are terrible reasons to buy it.

“Attention is a scarce resource. When there are many alternatives, options that attract attention are more likely to be considered,” wrote Brad M. Barber, a professor in the Graduate School of Management, University of California, Davis. There’s certainly no shortage of media coverage about Apple, which is still up nearly 30 percent for the year in spite of its recent slide.

But individual shareholders have a poor grasp of which numbers matter the most, Gur Huberman, a professor at Columbia Business School, said via email. “I venture to guess that most retail investors, even those who take a look at Apple's financial statements, lack the skills necessary to put the statements in context.”

This assumption is correct. In an August study of financial literacy among investors, the SEC found, “U.S. retail investors lack basic financial literacy. The studies demonstrate that investors have a weak grasp of elementary financial concepts.”

Being a fan of Apple products doesn’t make you better-informed about the company. In fact, it can prompt you to view it in a more favorable light. Numerous studies have shown that people are more optimistic about companies that elicit a positive sentiment or that they have an affinity with. 

Sticking with what you know — “familiarity bias” in behavioral economics jargon —  turns the stock market into a kind of popularity contest, undermining smart investing decisions based on performance.

“People root for the home team, and feel comfortable investing their money in a business that is visible to them,” Huberman wrote in a 2001 paper. But over the long haul, a more diverse portfolio almost always yields better performance.

This doesn’t mean you should rush to unload your Apple shares, though. Hitting the panic button and dumping a stock as soon as it falls is inadvisable since you could shortchange yourself on any gains if it recovers later.

CNBC: Apple passes 'death cross' as shares slide

“The main challenge is mapping financial statements (which reflect recent results) into future statements and future stock prices,” Huberman said.

“I think the majority of retail investors ... extrapolate on what’s happened in the recent past and project it forward,” said Benjamin C. Sullivan, a certified financial planner with the Palisades Hudson Financial Group. “What people don’t realize is the stock market is looking into the future. It’s not trying to say who already won the game.”