Last Updated Feb 18, 2011 11:27 AM EST
Apple's valuation equates to more than a third of a trillion dollars. To put it in perspective, the value of Apple shares today is more than 20% of our $1.65 trillion national deficit spending projected this year. That's a really big number in my book.
#1 Analysts are usually wrong
Years ago I wrote about a study done by Zachs Investment research that examined analyst performance. The conclusion drawn from the data was that investors would have performed far better by doing the opposite of what the analysts advised, rather than listening to, and following, their advice. Buying the "sell" recommendations, and selling the "buy" recommendations, worked. Other studies have arrived at a similar conclusion, and have illustrated the fallacy of listening to the analysts. Examples are as recent as the last couple of years. Remember how bullish they were in 2007, and how bearish they were in 2008? I would go so far as to say that I actually consider the analysts a contra indicator, so this is one sign Apple won't overtake ExxonMobil.
#2 Value Beats Growth
Value companies are seen as lower growth, while growth companies are the darlings of Wall Street. Research that developed the Fama-French Three Factor Model indicated that, in the long-run, value companies typically outperform growth. Another way of putting it is that good companies usually have lower investment returns than bad companies. I'm certainly not saying that ExxonMobil is a bad company, but investors have lower expectations for Exxon than they do for Apple.
Never bet the farm on something risky. Apple's volatility relative to the stock market is about three times that of ExxonMobil, as measured by a statistic called Beta. Two other ways to think about risk are:
- Buying it now means buying it after a 300 percent increase over the past two years. We all chase performance and it usually doesn't work out so well.
- Technology changes rapidly. Not too long ago, Nokia dominated in cell phones. The iPhone and Android based cell phones caused a rapid change. Anyone think that this can't happen again?
I don't know whether Apple, Exxon, or another company will be the most valuable stock on the planet a year from now. I don't know what the top ten performing stocks will be next year either. So I bet the equity portion of my portfolio on thousands of US and international companies of all sizes in broad total index funds.
Much as I love my iPad, I'm not going to bet my retirement on Apple or any one stock. Buy ExxonMobil, Apple, and every publicly held company on the planet!
Author's note: I own a small amount of ExxonMobil stock which I acquired when it was my first job out of business school in 1982. As I accepted the job, I was sure oil was just about to be priced at over $100 a barrel.
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