Size Matters. But Define “Size”.

The logo of the former largest company in the world, the East India Company. Graphic design was not a priority in the 18th century.

 

Quick, what’s the biggest company in the world?

If you’re a casual reader of the business news, or were last summer, you might say “Apple”. It was something of a noteworthy deal when Apple moved into the top spot, but what does that top spot signify? Does it mean that Apple sold its products for more money than anyone else did? That its owners got richer than anyone else did? That its owners would get richer than anyone else, if they liquidated their interest? Or something else? Are we thinking too hard about this?

Yes. The biggest company in the world is the one that generates the most revenue.
Isn’t it?

Sure, but what if there’s another company that generates slightly less revenue, but has significantly smaller expenses and thus keeps more of the revenue as profit?

Uh…yeah, you’re right. That’d make more sense. 

But isn’t value in the eye of the beholder? Say there was a company that took in even less revenue, and didn’t necessarily turn a stupendous profit. But, investors loved the company so much that they valued its stock highly. And if you wanted to buy this entire company, share by share, you’d have to spend more than you would to buy any other company.

Okay, you sold me. That should be the definition of the world’s largest company. There can’t be any other ways to interpret this, can there? 

CAN THERE? 

Well, how do you determine your own net worth? You add the assets and subtract the liabilities. Do the same thing on a macro scale and you have a company’s shareholders’ equity, which should be the definitive, absolute, certain way to determine a company’s magnitude. Aside from the other ways we just mentioned.

Okay, time for the real-world results.

REVENUE: The company that takes in the most money is Walmart. Last year, that meant $421 billion.

Walmart makes money on volume, not margins. Anything you buy at Walmart, Walmart bought for only a little bit less. Walmart doesn’t turn big profits on any individual item – the Birkin bag that the retailer buys for $45 and then turns around and sells to you for $20,000 isn’t on the shelves at Walmart. But the nickels and dimes that Walmart makes on every grocery item and article of inexpensive clothing keep its profits huge and its shareholders happy.

Which means Walmart spends tons on what it buys. It turns a profit, and a substantial one, but not as big as at least one other company’s.

PROFIT: Apple made $26 billion last year, despite selling a lot less than Walmart. How? Because while Apple sells less than Walmart, the profit on each item Apple sells is far, far greater than on what Walmart sells.

Last year somebody estimated that it costs Apple about $180 to make each iPhone. Meanwhile, new unlocked 4S models with 64GB of storage sell for over $800 on eBay. It’s hard to imagine a single product that Walmart makes a $620 profit on. Except the iPhones.

For the record, when Apple was announced as the largest company in the world in the summer of 2011 (or more to the point, when news of its financials trickled down from the business news departments to their knuckle-dragging counterparts on the general news desk), it wasn’t because of Apple’s profits. It was because of another metric.

MARKET CAP(ITALIZATION): Apple had the largest market cap in the world for a few weeks earlier this year, but ExxonMobil then caught up and regained its place on top. As of this writing, Apple has wrested the title away yet again. Right now, if you wanted to buy every share of AAPL it’d cost you $480 billion. That’s about ⅙ more than ExxonMobil.

Which leaves one remaining measure.

EQUITY: The company with the biggest difference between its assets and its liabilities is Bank of America, whose shareholders’ equity sits at around $228 billion.

Most of the top companies in shareholders’ equity are banks (both commercial and investment) and insurance companies. A major chunk of their assets come in the form of loans. What you and we sweat over, banks get excited by. Loans are their stock in trade, which sounds like an obvious point but is easy to forget sometimes.

How does this apply to your daily life? Well, to the extent that it forces you to think of multiple valid ways to look at the same problem. Who’s in a better place – the person who makes $150,000 a year, or the one who makes $120,000 and clears $60,000 after expenses while the first person spends every penny and then some? It’s a legitimate question, not a rhetorical one. And once you’ve determined an answer, how does that person stack up against someone who makes $70,000, but has a net worth of $5 million?

More money is better than less: if you don’t agree with that, you probably shouldn’t be reading our blog. But there are multiple ways to determine who’s in the most enviable financial position.

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**Carnival of Financial Camaraderie #26**

CYC Gets #Tagged

Our friends at DQDYJ.net (Don’t Quit Your Day Job) called us out in one of those infernal games of cybertag. They posed some zany questions and challenged us to answer them. The way this works, as is our understanding, is that after we do that we’re supposed to derive 11 questions of our own and continue the chain. This gives us a completely new medium in which to explain the CYC rationale for doing things, so let’s get started. But first:

Our reading comprehension being what it is, we started by mistakenly answering the questions that DQYDJ had answered, rather than the ones they posed to us at the end of their post. Our answers follow: first to the questions we weren’t supposed to answer, then to the ones we were. We finish with 11 new questions, posed to the next link in the chain.

Have you ever been ripped off and for how much?

Yes, by a crooked, sawed-off little photographer named Casey Wiesel of 4413 Carrier Dove, North Las Vegas, NV 89084-2661, (702) 953-9540. He refused to pay $1200 he owed for a job, got sued, lost in district court, and was ordered to pay a judgment. He still hasn’t paid, in violation of the judge’s order. Also, his new baby is funny-looking.

Do you have pets? Are they awesome?

(Question tabled for fear of starting a disagreement.)

What is the air-speed velocity of an unladen swallow?

Great, a Monty Python joke. When do we start quoting The Simpsons and Office Space, too? Also, the question is retarded. Either “speed” or “velocity” is redundant.

Why are most children’s musicians terrible?

It’s not just children’s musicians. Most musicians, regardless of audience, are terrible. If a higher proportion of children’s musicians than “adults’” musicians are terrible, it’s because the former only have to appeal to young mommies, who have the worst taste in music of anyone on the planet.

Put it this way – if Jimmy Buffett didn’t sing the occasional song about pot, he’d be the greatest children’s entertainer of all time. He’s got it all – puerile wordplay, colorful costumes, easy-to-understand vocals. He even dresses like a kid.

What’s the most offensive thing about the $5 bill?

That Congress has never seen fit to emblazon it with the face of our greatest president, Calvin (“The Business of America is Business”) Coolidge.

Prior to Jeremy Lin’s current basketball greatness, he was staying on his brother’s couch because he didn’t have a definitive contract with the New York Knicks. Was the couch long enough to fit an out-stretched Jeremy Lin?

No. Jeremy Lin can probably reach 23″ above his head. That means a couch would have to be 8’4” long to accommodate him. The vast majority of couches are under 7’ long.

What’s the least you’ve purchased with $100?

A ticket to see Van Halen on their 2004 tour. Sammy sounded fine, Alex sounded fine, Mike’s bass didn’t appear to be plugged in, and Eddie gave an alcohol-fueled performance that, like music itself, can’t accurately be summarized in words. His tone was awful, his riffs were incomprehensible, and halfway through the solo he resorted to lying down on the ground and kicking his legs out like an indignant toddler. And not in the fun way that Angus Young does it, just in an inebriated way. The $100 wasted on that ticket took years of goodwill with it. Eddie has apparently sobered up, and the new album isn’t horrible, but you should donate $100 to the Corporation for Public Broadcasting before buying a ticket to see Van Halen on this upcoming tour. (That was sarcasm. If you have $100 to burn, spend $10 of it on our book and the rest here.)

What’s a reasonable amount of money to spend at a strip club?

Coming from a former strip club DJ, who was tipped out by the dancers every night, $12,000 is a good starting point.

How much do you tip the bartender? Really? That’s it?

A dollar a round, but that’s for club soda and Diet Coke.

How much would you pay for the perfect hamburger?

$2.29, apparently.

Is an iPad worth it?

We’d need the 64 GB, 3G one. Which costs $829 at Apple.com.

HOWEVER…there’s a guy with a 647 rating on eBay who’s selling new, in-the-box iPads 2 for $600, which is less than you’d pay for a new 64GB iPhone 4S.

But if you already have the latter, an iPad is thus less valuable to you, even with its larger screen and high-resolution pornography. And if you happen to have a MacBook Pro, for those times when you need to drink the Apple Flavor-Aid on a larger screen, that further diminishes the utility of an iPad for that particular consumer.  Throw in ownership of a Kindle, with its Methuselaic battery life and ability to be read in bright sunlight, and the iPad’s looking like a fancy paperweight right now. Plus you’d be looking at close to $1000 a year in data usage, guessing from what customers on AT&T and Verizon pay. So no, at this point it’s prudent to say that the price must to fall to -$200 or so before an iPad would make financial sense.

 

 

Okay, now the questions we were supposed to answer:

Would you rather be 8 feet tall and 100 pounds or 2 feet tall and 800 pounds?

8′, 100 lbs. Assuming that you’d still be able to move around, and wouldn’t break with your first step. Either way, you’d have a chance to be mobile, which a 2′, 800-lb. person would not.

Pick one: Canada, United States, Mexico.  Explain why it is superior to the other two.

Come on, how about a hard one? Having lived a couple of decades in Canada, only to move to the United States, this humble blogger will give an informed answer.
CanadaUSMexico
Capacity for a private citizen to have discreet deadly force at his disposalnoyesno
English-speaking women in revealing clothing for more than 6 weeks of the yearnoyesno
Little Beach, Mauinoyesno
Some autonomy in medical decisions, at least until 2014noyesno
30-minute flights to the Bahamasnoyesno
Cannibal women walking the streets freelyyesnounknown
No official language with gendered articlesnoyesno
Football as de facto national sportnoyesno
Lacrosse as de jure national sportyesnono
Soccer as national sportnonoyes

 

What is the best type of Personal Finance Writer?  (Think of writer archetypes – Investor, Debt Blogger, Wild-card, Contrarian…)

Aside from uncategorizable us? The debt bloggers blow chimp, we’ll start with that. The investors seem to know what they’re talking about more than most do.

Lump sum investing versus dollar cost averaging…Which is better?

Dollar-cost averaging. We’re all in this for the long term, right?

In the Led Zeppelin song Stairway to Heaven, what does the lyric “to be a rock and not to roll” mean?  Bonus points if you can somehow work Boleskine House into your answer.

Thanks for clarifying that you meant the Led Zeppelin “Stairway to Heaven”, and not someone else’s. Like Far Corporation, for instance. Which is just a cover of the Zeppelin song. Consider that the line follows “And if you listen very hard/The tune will come to you at last/When all are one and one is all”. Which is a reference to the infamous backward masking in that song. “To be a rock and not to roll” means nothing, but it’s the closest you can come to “Satan is my master” when spoken in reverse and still sound like English.

What’s your favorite dinosaur?

Triceratops, because it was the last one standing.

Paper or Plastic?

Plastic, and don’t get us started.

This question is being answered in Maui County, Hawai’i. Last year the county banned plastic bags from grocery stores, because Hawai’i is a state full of idiots. There’s a supermarket across the street, and now they give you those giant 1970’s-style paper bags, the ones without handles. This severely limits how many groceries you can carry at once. With plastic bags, carrying 8 at a time is no big deal. With paper bags, you’re limited to 2, and you have to use your entire upper body, not just your hands.

Did we mention that the supermarket is right across the street? It used to be easy to walk a few hundred yards, buy groceries and walk home. Now it’s a car trip, because otherwise we’d have to carry the bags home in shifts. So for whatever fossil fuels the geniuses in the county government tried to save by banning plastic bags, we’re now burning far more than that by taking a 40-second drive across the street. Also, whoever imposed this ban has clearly never owned a pet. But the paper bags are reusable! It says so right on the front panel. That is, when they don’t rip or soak through, something plastic bags rarely do.

If you had to pick, would you consider yourself a dog-person or a cat-person?

(Question tabled for fear of starting a disagreement. See above.)

What would you do with an extra $100,000?

Buy 2 cash-flowing single-family residences. This isn’t dollar-cost averaging, but the question is a hypothetical. The previous one was not.

What’s the best thing you ever purchased?

A $99 annual gym membership, perpetually renewable. That question just inspired a blog post, so we’ll leave the answer there.

Would you rather lose your phone or the internet for a week?

Phone, easily. Last month’s talk time totaled 7 minutes.

 

We’re supposed to forward this to 11 people, but we’re breaking the chain right here. Or shortening it, at any rate. Control Your Cash is at least in the 3rd series of links in the chain, which means that 1,453 people have received this even without our help. There aren’t enough questionnaire recipients to go around, and the only one whose answers we’re interested in (and who hasn’t already been called out by anyone else) is Paula Pant of Afford-Anything. Por Mlle. Pant:

Your next international trip will be paid for (standard, non-luxury accommodations.) One country only. Where do you go?

Which will happen first: Dow 11,000, or Dow 15,000?

Okay, Dow 10,000 or Dow 16,000?

Oxford comma: yes, or no?

Isn’t it time we stopped minting pennies? 

Can you teach people to change their financial habits, or is it like asking them to change their eye color? 

Have you ever bought 89-octane gas? If so, why? 

Which is the best national park in the system? 

Do women seriously not care about looks? 

Have you ever bought an IPO? If so, why?  

White grits or yellow?

DOW HITS 7634! What now?

The father of irrational exuberance. If Bush had just yanked his hands down, a lot of problems could have been avoided

 

Huge, breaking, earth-shattering, paradigm-shifting, cliché-inspiring news this week, as the Dow Jones Industrial Average finally pawed its way back over the critical 7634 mark. No longer will we have to suffer in a world where the sum of the prices of 30 blue-chip stocks multiplied by a constant will begin with 7-6-2 or some lesser string of digits. Instead, let’s all stop at this milestone and take a needed respite.

Oh, sorry. Yeah, we were using base-12. Would you prefer we used base-10? Fine, but we’re going to use a different currency, euros. Which would make the Dow level 9807. No wait – let’s use base-12 and euros. That’d make the Dow level 5813. Isn’t this fun?

Most of the stock market “news” results from humans having 5 fingers on each hand and needing a way to count things. There isn’t any appreciable difference between a Dow at 12,999 and a Dow at 13,000, except that the latter burns a different array of bulbs in a digital readout and gives mathematically challenged journalists a chance to write headline fodder. Stop believing that this is in any way important.

From our favorite purveyors of loaded rhetoric, the Associated Press:

The Dow passed 13,000 about two hours into the trading day.

And from another AP story:

The average was above 13,000 for about 30 seconds before dropping back. It reclaimed the mark just after noon.

In the words of Anti-Nowhere League, “So (expletive) what?” They’re talking about this like it’s the moon landing, calibrating the event by time and duration so future generations will have a historical record of it.

Furthermore, the mere addition of one point to the Dow then becomes the catalyst for everything that follows. One more AP story, and a stunning example of why reading the news with a trusting eye is worse than not reading it at all:

The 13,000 level is a psychological milepost, but in a market built on perception, it could influence more cautious investors to pump more money back into the stock market, analysts said.

“You need notches along the way to measure things, and that’s as good as any,” said John Manley, chief equity strategist for Wells Fargo’s funds group…

Dan McMahon, director of equity trading at Raymond James, called the 13,000 marker a “positive catalyst, and that’s what we need to get us through the next range.”

Sounds like these Wall Street guys are as susceptible to “decimal bias” as the rest of us, right? No. McMahon continues:

In the end, he said, it’s just “a big round number.”

Which shows that the claims that “analysts said…it could influence more cautious investors to pump more money back into the stock market” is an unmitigated lie. Or if not a lie, then at least an unprovable assumption. Sure, Dow 13000 “might” influence investors to buy stocks. It also “might” turn the milk in your fridge sour. You don’t think so? Then show why it can’t.

CBS News has a video clip with the wonderfully objective title: “Dow 13,000: Time to Invest?”, which itself summarizes why financial illiteracy is pandemic. Yes, first let’s overpublicize a rise, however modest, in the Dow level. Then, let’s imply that people should buy stocks. Because that’s when you want to buy, when prices are rising.

You want superlatives? The Dow is now at its highest level since May 2008. When the Dow was at 12,990, that was its highest level since…May of 2008. Add the inexorable effects of inflation, however modest, not to mention whatever fees you paid for your index fund, and if you’d bought before May of 2008 you’d still be behind. If, however, you were dollar-cost averaging and buying units regularly since then, including when the market hit a local nadir of 6627 in March 2009, you’d be ahead. The Dow’s most recent movements, i.e. what it’s done in the past week, mean nothing.

We’ve talked early and often about the need to handle your financial transactions in a cold, calculating manner. Save the emotion and the irrationality for your personal, non-monetary life. When everyone else is chasing something, step back and ask why. When everyone else is fleeing something, same thing. And when a numerical quirk becomes front-page news, bumping Iranian oil embargoes to the second line, think about what that really means. To the extent that it means anything.

Yet another reason why our use of exclamation points on this site is so judicious. If a bunch of talking empty heads filling time in a TV studio have somehow convinced you that a .06% rise in the Dow is a reason to get your money out of your beer fund and put it towards stocks, we can’t help you. Besides, you don’t want to be helped.

There’s a time to get going, and a time to sit back (apologies to St. Francis.) If you don’t have an investment plan yet, run to the nearest brokerage house, bank, or human resources office and get one. It’s never too early to start.

But once you’ve invested, which we’re presuming you have, don’t drown in the details. Try to look at your portfolio quarterly. That recommendation is like Tolstoy’s challenge to not think of a white bear, but if you can do it, you’ll not only have greater peace of mind, you’ll be able to notice measurable differences in your portfolio more easily. It’s the same reason why parents marvel at how quickly their nieces and nephews grow, rather than how quickly their own kids do.

Getting excited, depressed, or even having an opinion about Dow 13,000 is mayfly syndrome. But you’re a human, with a lifespan tens of thousands of times longer than your typical mayfly. Even a giant daily swing in the Dow is utterly irrelevant, let alone one of just a few points.

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**Top Personal Finance Posts of the Week-Cutest Kids Ever Edition**