After-tax gain

How many iPads can I buy after investing $10,000 in Apple?

Q: Can I effectively get Apple to buy my iPad for me in a few months by buying $10,000 in Apple stock, adjusting for taxes?

A: Seems like there's nothing Apple's (AAPL) stock can't do. Given the parabolic rise of shares of Apple, it's become the can-do-no-wrong company with the can-do-no-wrong stock.

And when a stock does no wrong — only goes in one direction (up) and rarely has bad news — as Apple's has, questions like yours come up. And you know what? While your question might sound outlandish, it's not only true, but actually understated. It turns out that had you bought Apple stock at the end of 2011, you could have bought six iPads by mid-March.

With most stocks, what you're asking about would be highly ill advised: Buying shares of a company with the hope of turning around and flipping them to buy a $500 product in a few months. But several readers have said that's exactly what they're doing. They buy Apple stock, watch it reliably soar and then sell shares to buy Apple gadgets.

Your strategy would have worked like a charm this year. Consider an investor who bought $10,000 of Apple stock on Dec. 30 when the shares were trading for $405 a share. The investor would have been able to buy 24 shares of the stock.

Fast forward to March 16, 2012, the day the latest iPad was released for $499. Shares closed that day at $586, meaning those 24 shares would be worth about $14,000. Yes, you read that correctly. In just three months, the investor would have gained $4,000 on the $10,000 investment.

How many iPads could you buy? Assuming 5% sales tax, the iPad would wind up costing $523. What about your $4,000 gain in Apple stock? Since the investor held it for less than a year, the gain would be taxed at the ordinary income tax rate, let's say, 20%. That means the after-tax gain after three months would be $3,200.

The bottom line: Investors who bought just $10,000 in Apple stock on Dec. 31 could buy six iPads, even after paying Uncle Sam his due.

Apple's stock has been rising so quickly investors are wondering if it's the aluminum bullet they've been seeking. Could this one stock be their ticket to a cozy retirement? So far, the answer would have been yes.


Others wonder if the rules of diversification are outdated when there's a one-in-a-lifetime stock like Apple. Blending other assets with Apple would only mute its return. And yes, you're right, owning the stock would even give you the pocket money to spend on more of the company's pricey gadgets.

But just because this strategy has worked has no bearing on whether it will continue to work. Apple is a darling stock, there's no question. There's a rush by investors, even professionals, to pile on.

If you believe in free-market economics, though, when there's a company enjoying such fat profits, eventually competition arises. Sometimes it's another large company that successfully leapfrogs the dominant company using research and development spending or other advantages. Yet other times, a small upstart comes up with a new way of doing things that jumps past the leader. Sometimes, a company becomes so dominant the government steps in and intervenes.

Unless the rules of capitalism are suspended, eventually, Apple will encounter a rival that's able to take it on. If that happens, using Apple stock as an ATM will cease to work. And that's why your strategy seems to be setting you up for trouble. Remember that Apple stock can correct, especially considering how rapidly it's risen. If there's any disruption in the company's business, a severe downturn in the stock would be expected. And that's why using the stock market for quick gains, traditionally, has not worked out well and is not a good idea.

But perhaps this time is truly different. Until then, enjoy your new iPad or maybe six.