One (Trillion) is the loneliest number

Thoughts for the Week | August 17, 2018

Earlier this month Apple became the first $1 trillion company. The press went bananas.  

1 trillion is a big number, but it’s a “lonely number”. We recently read about lonely numbers in Hans Rosling’s book, Factfulness: Ten Reasons We’re Wrong about the World – and Why Things Are Better than You Think. The book discusses how numbers and facts, if not placed in proper context, can be meaningless or even lead to false conclusions.  

Lonely numbers are numbers presented without context. We often misjudge their importance because they seem really big and impressive in absolute terms, but can be much less so on a relative basis. It’s a human bias Rosling calls the “size instinct”.  

Rosling, a pediatrician who spent much of his career in the world’s poorest countries, explains how the size instinct influences our perception of advances in modern healthcare. He writes, “4.2 million babies died in 2016.” This is a large, uncomfortable, heartbreaking number. But put into perspective, it’s actually encouraging. In 2015, the world lost 4.4 million children. The year before that 4.5 million. In 1950, 14.4 million. 

And the numbers look even better when you compare them to how many children are born every year. In 1950, 97 million children were born, and in 2016, 141 million children were born. The ratio, called the infant mortality rate, dropped from 15% in 1950 to 3% in 2016. Advances in global health can go unnoticed when we consider only lonely, absolute numbers instead of more thoughtful, relative numbers. 

Lonely numbers and the size instinct can also affect the way we interpret the value of assets, like stocks. The media got excited about Apple’s big $1 trillion number. But $1 trillion means little without perspective. A good first step? Take Rosling’s advice: get some historical context and calculate a simple ratio before you draw any conclusions.

We have a confession. The opening line of this week’s Thoughts isn’t entirely true. The world has seen companies worth more than $1 trillion…if we adjust for inflation. This is important because a dollar today is worth a lot less than it was 5, 10 or 381 years ago. 

At their peaks and in today’s “inflation adjusted dollars”, Standard Oil of 1911 would have been worth an estimated $1 trillion; PetroChina of the early 2000s an estimated $1.7 trillion; The South Sea Company of 1720 an estimated $4 trillion; and The Dutch East India Company of 1637 over $8 trillion. The $1 trillion price tag seems a bit arbitrary when placed in historical context. 

It’s also helpful to compare a lonely stock price to the operations of the company in which the share of stock represents an ownership interest. After all, that’s what stocks are: ownership interests in business. If you’re thinking about owning a business (or share of stock), consider comparing the profits to the price you pay for it. Over the past 12 months, Apple generated $56 billion in profits, and compared with a $1 trillion price, this represents a PE ratio of 17.8. 

Apple’s record high price doesn’t correlate with the record high PE ratio of the last 20 years (200), and it’s a bit lower than the average (20.8) over those same 20 years (Source: The Bloomberg). This is not a recommendation to buy Apple stock, and there are other things to consider before making an investment in any company. The point is price alone doesn’t provide sufficient information to make an investment decision, just like a lonely number rarely provides sufficient information to make an informed opinion.

We spend much of our time wading through noise to get to facts, and then putting those facts into a coherent analytical framework with which to make decisions. Lonely numbers represent a challenge – often hyped in press, but a second or third level look, placing them in the appropriate context, can tell a different story – sometimes meaningless, (like the price of the S&P 500 if not in relation to earnings), and sometimes the opposite (like infant mortality rates cited above). “One” may be the “loneliest number”…but it has plenty of competition these days. 

Enjoy your reading and your weekend.

Mike, Scott, Zack, Cate, Marina, Julia, and Willis

Private Wealth Advisors

Mike Burbank, Managing Director Wealth Management

Scott Hafeli, CFA

Zack Schiller, CFP

Morgan Stanley Private Wealth Management  

555 California Street, 14th Floor | San Francisco, CA  94104  

Office: 415 576 3131  

Sources:

Factfulness: Ten Reasons We’re Wrong about the World – and Why Things Are Better than You Think https://www.visualcapitalist.com/most-valuable-companies-all-time/

S&P Capital IQ

The Bloomberg 

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This illustration in this piece is hypothetical and shown for illustrative purposes only. The illustration is not intended to predict the returns of any particular investment, which will fluctuate with market conditions. Actual results may differ from those depicted in the illustration. The Burbank Hafeli Group at Morgan Stanley Private Wealth Management is focused on serving the investment and financial planning needs of the founders of food, beverage, and consumer products companies and private equity and investment banking professionals. Mike Burbank was recognized as one of the Top 400 Advisors in the United States by the Financial Times in 2013 and 2014. Scott was also recognized as one of the Top 400 Advisors in the United States by the Financial Times in 2015.  

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