Apple Too Big For the Dow Jones Industrial Average 218
An anonymous reader writes "Apple is clearly the hottest tech stock on the market right now and the company is clearly at the vanguard of technological innovation. Consequently, many have wondered why Apple isn't part of the Dow Jones Industrial Average (DJIA). As it turns out, Apple's astronomical share price effectively prohibits the company from joining the DJIA as it would disproportionately influence the index."
Who really looks at the DJIA? (Score:3, Informative)
The only people who really pay attention to the Dow are the talking heads. The money runners look at the S&P 500 when benchmarking market returns.
The Dow is an archaic measure that for some reason sticks around.... tradition?
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Drama.
The media loves the Dow because it can always be trusted to make dramatic moves. The S&P just isn't as exciting.
I keep expecting Apple to come crashing back to earth, but it keeps right on defying gravity.
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The headline is misleading: its "high share price", not "too big". Its perfectly possible for a small company to have a high share price.
Share prices can be much higher, Berkshire Hathaway has a price of 103,000
The main reason the Dow is used by the media, is because ignorant financial journalists think its the best measure - it is in their terms, where "best" means most brand recognition.
The only legitimate reason for using it is for long term comparisons: it has existed a lot longer than the S & P 500
The S&P, DOW and Nasdaq are the same (Score:2)
Go look at a long term trend of all. They respond identically, it's basically irrelevant which you use.
And I'll just add for the Apple sycophants. Apple is are in a huge bubble. Almost as big as the Treasuries bubble.
So? (Score:4, Informative)
*Shrugs*
So? If they want to be in the Dow they can run a few stock splits.
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DJIA ranks by share price, not market value, which is why there's a problem. If they split the stock a few times, the nominal stock price would drop, meaning that it wouldn't be a too-large component of the DJIA. (Not weighting it more than by share price is silly, but here we are.)
Price Weighted Average (Score:3)
The Dow Jones is not exactly a price weighted average.
When it first started it was. They averaged 12 stocks and there you go. No fancy market cap calculations. (Or course, back then it was hard to figure out a companies market cap, but that is something else.)
Then, as stocks issued dividends, spit, and companies were replaced, Dow switched over to weighing each stock price with a factor. So, it does not matter how high Apple's price is when it introduced into the Dow, it's stock will be given a factor that
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That's not true; the Dow is even simpler than you are implying. There is no weighting at all applied to the individual stocks in the index, so it's incorrect to say that they weigh "each stock price with a factor". Instead, there is only one factor (the Dow divisor) for the entire index. All the share prices are simply added up and then divided by the divisor.
When AAPL was added to the Dow, the Dow divisor would be adjusted to account for the difference in price between AAPL and whatever it replaced, but th
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I don't understand why that should be necessary. The DJIA is a weighted system, if they think AAPL's price is too heavy, give it a weight that's less than one. They alter a company's weighing to follow when an indexed stock splits (or reverses a split), so it doesn't change the DJIA figure.
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An index is not exactly doing a good job of selection if whether a company wants to be in can influence whether it is in.
That seems dumb. (Score:3)
So they don't want to split their stock - that's a horrible thing now? The trades are too granular now?
If it's really a problem, get enough of your fellow traders together, make a giant offer to buy Apple, then set the prices what you want them to be. Business decisions are made for worse reasons, I guess.
Why is this a story?
Ryan Fenton
Re:That seems dumb. (Score:4, Interesting)
There's something to be said for having a high share price if the company is big and successful- those who tend to buy tend to hold on to it for a long period of time, and the day to day operations of the company are directed toward a long-term profit mindset. When a company is traded constantly and when shareholders are only buying it to look for a short to medium term profit (like a year or two) then they don't are how the company performs down the road, and the board will reflect that, making decisions that make money now but could cost the company everything long term as they didn't invest in the long term.
As much as I dislike Apple sometimes, they do seem to have the development cycle down and they don't rest on their laurels as far as trying to make each product line last as long as possible before being forced to replace it. Many companies won't change unless they're forced to by consumer-driven market choices. Apple changes faster than just about everyone else, and enough people buy into the hype with it that they keep selling products for the long term.
It'll be interesting to see how this plays out in the next decade or so, as Jobs becomes less and less relevant.
High share price irrelevant (Score:3)
There's something to be said for having a high share price if the company is big and successful- those who tend to buy tend to hold on to it for a long period of time ...
I don't buy that. People tend to think in terms of a dollar amount. If a stock is $40 rather than $400 they just buy ten times as many shares. Letting your stock go up into the hundreds without splitting is just a vanity thing, a PR thing. The behavior you allude to may have some validity with a Berkshire Hathaway share at $100,000 but not something with a share price of $400. The little guy can still buy a single share at $400, unlike $100,000.
... and the day to day operations of the company are directed toward a long-term profit mindset.
This has nothing to do with Apple's share price. It has everyt
Who cares about stock splits? (Score:2)
There used to be downside to having a high stock price because of odd lots. Nobody cares about that anymore. Here is a quick history lesson.
Jargon - a odd lot is any sale where the number of shares bought / sold is not divisible by 100.
Prior to the 70's when you traded stocks you traded stocks. When you sold stock you would take you stock certificate down to your broker, they would send it to the main office, they would send it to the company to be registered, the company would send it to the new broker, wh
DOJA != DJIA (Score:5, Informative)
Dow Jones Industrial Average (DOJA)
Reasonably sure that no one in the world abbreviates it like that. In fact, Googling "dow jones" and "doja" together, brings up... This exact news story. And no others.
The Stock Market is a Joke (Score:4, Interesting)
Or am I just another FUD spewing pinko-commie?
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You are spewing FUD.
Yes, there are things you can do better if you have money, but that doesn't mean the 'house' is stacked against you..also, there isn't a house in the casino sense.
If you had invested in the DOW in Apr 2009, you would have made money.
Something the GOP doesn't point out...the DOW has gotten a lot better, in fact it's at 2006 levels, and still climbing.*
*AS a trend, some days it's lower then others.. but it's trending upward. Even with Obamas economic plan being castrated by the GOP, it's s
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Come back in three months and let me know how the market is doing compared to 2006. There is a HUGE correction on the way.
Re:The Stock Market is a Joke (Score:4, Interesting)
If you believe that, short it and make money.
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He said three months, so he believes he knows when.
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The liquidity that the banks have now, is primarily the result of quantitative easement. They don't really have any more assets than they did in 2006, but they were able to suck up nearly all the money that the Fed injected into the economy. Which is why you haven't seen much, if any, inflation even though the Fed injected literally trillions of dollars into the economy.
Ultimately, it's a false sort of liquidity, because they can't use those funds to buy things, the funds are primarily there as security in
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If you had invested in the DOW in Apr 2009, you would have made money
Everybody can make money in hindsight.
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Invest in the dow now, and you will make money in 20 years.
Well, maybe 30.
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Maybe. Another school of thought says we've just passed the peak of the age of abundance. Place your money and take your chances.
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Everybody has a theory. When the randomness of the markets benefit them, they feel the theory is proven. When it goes against them they look for another theory.
Pigeons do much the same thing in laboratory tests when they are fed randomly. They develop series of movements that they repeat, believing it makes the food come.
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Something the GOP doesn't point out...the DOW has gotten a lot better, in fact it's at 2006 levels
That it was at these levels in 2006 isn't really what most people go by. It first reached these levels in 1999. Of course, that's just nominally.
If you figure in inflation, by current government CPI metrics, it would need to be at $15,100 to be at the same 1999 levels. If you use the 1950-1990's government inflation calculations, it would need to be nearer to $20,000 to be equivalent. That doubling would li
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According to Chris Hellman, the defense budget is more like $1.2 trillion. Link: http://www.tomdispatch.com/blog/175361/ [tomdispatch.com]
"To get closer to a real figure, it’s necessary to start peeking at other parts of the federal budget where so many other pots of security spending are squirreled away."
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The pensions and health plans are for soldiers. The purpose of intelligence is defense.
In conclusion, the parent post is using hyperbolic exaggeration to try to discredit the article I linked to, shamelessly misapplying "reductio ad absurdum" by extending the items which have a direct relation to defense to those that don't.
What is a direct relation? (Score:2)
shamelessly misapplying "reductio ad absurdum" by extending the items which have a direct relation to defense to those that don't.
I think Wyatt Earp's point was that he'd like to see a precise definition of such "a direct relation".
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http://en.wikipedia.org/wiki/Relevant_logic [wikipedia.org]
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I'm sorry, but that's bullshit semantics. It doesn't matter whether spending is to the DoD if the purpose is clearly defense it's still defense spending. The Intelligence services wouldn't exist if not as a means of supplying the information necessary for the DoD to conduct its affairs. Consequently, I have a really hard time buying the notion that it isn't defense spending.
Unless of course you're implying that the intelligence they get isn't any good or isn't being provided for use in defending the country
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Actually, one of Ike's original rationalizations for the "National Interstate and Defense Highways Act" is... defense. It's not so much anymore.
Any pension and health care for armed service members deserves to be in the defense spending. Splitting it off is one of the ways used to make the defense budget seem smaller.
Intelligence is used for national security to i.e. defense.
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I am not sure it is Incorrect. If there was ever a ground invasion of the US, those interstates will still be important. They loop and connect every major city...
Re:The Stock Market is a Joke (Score:5, Insightful)
You're a FUD-spewing pinko-commie - which is not to say you're completely wrong, but you're missing the point.
It's true that to day-trade, it's all about the high-frequency crazy-fiber stuff. But you know what? You don't need a fiber link to go out and buy a share of McDonald's (today's prices: $87.48-$89.72) and pick up their ~61-cent quarterly dividend. You don't need a billion-dollar real-time system to pick up a piece of Apple ($412.00 - $421.59) and own a fraction of their still-growing revenue stream and cash hoard. You can go out there and place your order for just about as many shares as you care for, for any stock (or your selection of exchange-traded funds which hold hundreds of stocks for a minimal expense ratio), pay about $10, then come back three to thirty years and ask yourself "who fucking cares how fast the HFT traders were trading on 21 June 2011?"
HFT is all about things like spotting a tiny market inefficiency of a fraction of a cent across a half-billion shares on two different exchanges and exploiting it for whatever it's worth. You were never going to play that game; don't kid yourself.
Which is not to say that there aren't people rigging the game to their advantage all over the economy - but "high-frequency trading" isn't really the tool they're using. When you're in the really big leagues, your most powerful tool is The Government. (Bailouts, subsidies, implicit government guarantees, sketchy Solyndra loans, what have you.) Then, the next few rungs down on the latter are all about exploiting the shareholders of your publicly-traded company. That's the sort of thing we should worry about, not the HFT crap.
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Most people aren't in it to make money so much as to try avoid losing it from inflation.
But if we had sound money...
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Interesting how that works.
Governments inflate to buy votes. The banks are the first that get to use that money so they get very rich producing nothing. Meanwhile the people are forced to invest with those same banks to attempt to keep pace with inflation plus they have to work much more than they used to even though there has been a big increase in productivity.
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I used to look at the stock market (and investing in general) the same as you. To me, the financial world was just a big game that only fat cats could play, let alone win. The rest of us were doomed to stashing whatever we could scrape together from our minimum wage paychecks into micro-interest savin
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Have you ever heard of indexing? The market's not tilted against you unless you're like most people and try to actively beat it. Read "A Random Walk Down Wall Street", then invest passively, long-term with appropriate diversification across world economies and an appropriate allocation of fixed income and equities to meet your investing goals and time horizon. You'll be humming along well above the fray of day-traders, stock pickers, hedge funds and other gamblers that wipe themselves out with management fe
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The stock market is only gambling if you play it that way... trying to guess which stocks are going to go up, which will go down, and when. Just about all the amatures play it this way, and then they lose 75% of their retirement savings...
In fact the statistics are that 80% of mutual funds (the huge companies with multimillion dollar hotshot traders) p
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The stock market is white collar gambling that doesnt reflect the true value of the underlying investment.
What is the property market ?
Average (Score:2)
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Do they know what an "average' is?
Do you?
The (arithmetic) mean, which is probably what you're thinking of, is only one type of average: mean, median, harmonic mean, etc. The Dow Jones is a weighted mean; weights can be calculated in such a way as to minimize the effects of outliers. If there's a problem, it's with the way they calculate the weights, not with the concept of an "average" in general.
DJIA has a weight problem (Score:2)
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DJIA isn't weighted. Where are you all getting the idea that DJIA is weighted?
DJIA is (Score:5, Informative)
The Dow Jones is an older index in which each company's weight in the index is determined by its stock price. In more recent indicies like the S&P500, stocks are weighted by market capitalization. Assigning weights by stock price is silly because it makes no intuitive sense and means extra work is needed to prevent events like stock splits from moving the index around.
So anyway, this isn't really about Apple, it's just a technical detail about a legacy index. Apple's share price is high ($412 as I type this), but so are plenty of other companies like Google ($539) and Berkshire Hathaway ($101250!).
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Berkshire Hathaway ($101250!).
101250! = 6.7994476169830511727851464589251787226197877510690... × 10^462826
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Wow no wonder Warren Buffett is so rich
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Empirically though, the difference isn't that bad [yahoo.com]. OK, it's bad if you look at the 10% difference at the end of the chart; but it's good when you look at correlation over time. Do the Dow stocks always do better because a small index has a more obvious "must buy because it's in the index" effect, or is this just true over the timeframe in the chart? Left as an exercise for the reader.
FWIW, the Dow concept of "the biggest 30 are really all that matter" is interesting; but yes, market cap weighting would c
Doja is marijuana, DJIA is the Dow 30 (Score:2, Funny)
As in Dow Jones Indus--oh never mind.
The writer and the reasons for Apple now being in the Dow 30 are both high.
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As in Dow Jones Indus--oh never mind.
The writer and the reasons for Apple now being in the Dow 30 are both high.
Just... wow. Hate Apple, don't hate Apple, whatever. But to hate them so much to deny that they successfully move product and make lots of money... its self-deluding. You know, it really can't be luck, you know that, right? Its just not possible for Apple to have "lucked" their way into financial global boondoggle, you get that right? Either you realize this, or you are quite stoned my hippie friend.
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I don't see why you think that statement was anti-Apple. He complained about the "reasons for Apple now being in the Dow 30", not about the company.
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Actually I typo'd now, meant to type not. Slashdot is my doja, I guess I get a high from being here and it messes with the typing.
Apple has been trading below-value for a long time now. People see the high per-share price and aren't sophisticated enough to know that the share price is simply the result of a division problem involving market cap and shares outstanding, and thus believe stocks that have a high share price are automatically "expensive" stocks when they may be cheap (as with Apple based on ea
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Which is why stock splits are good -- take advantage of the math-challenged, and buy before the split goes into effect. It makes you *look* to an outside observer like one of the math-challenged, but if you sell right after the usual post-split bump.. you aren't one of them.
DJIA is irrelevant anyway (Score:3)
The index is too narrow. S&P 500 and Russel 2000 have much better coverage of broad economy. Not coincidentally S&P500 and Russel2K ETFs, futures, and options are among most traded on capital markets.
The publisher of the index, Dow Jones agency also owns Wall Street Journal and that maybe why DJIA is not forgotten just yet.
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And this is how I know that I know nothing. (Score:2)
Wait, wait, wait, wait, wait. The media has been using the DJIA practically religiously to tell us whether or not our country has an economy. But if they can selectively ban companies that do well, are we really in a state of near financial emergency?
Are we only in a recession because companies who are going to say we're in a recession are allowed to be counted in the DJIA?
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Are we only in a recession because companies who are going to say we're in a recession are allowed to be counted in the DJIA?
No. The DJIA and S&P 500 track each other pretty well over the long term. Look [yahoo.com].
total BS (Score:2, Flamebait)
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There are no publicly trade companies bigger than Apple by market capitalization (Apple is worth more than 2x Walmart's ~$175b). Having said that, the headline is still wrong. It should have said stock price.
Financial illiteracy (Score:2)
Title:
Apple Too Big For the Dow Jones Industrial Average
TFA:
Apple, trading at about $420, would have the largest weighting in the 30-company measure because Dow companies are ranked by stock price, not market value.
Apple is not too big for the DJIA, it just has a ridiculously high stock price. On its own this is meaningless. The basic formula for stock price is market capitalisation (company size in dollars) divided by number of shares in circulation, which means that a company can increase their stock price without increasing company size simply by reducing the number of shares in circulation. Don't you love financial illiteracy?
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AAPL is currently selling at 16.3 PE ratio. Compare with Google 19.4
This is not the Ridiculousness that you think it is. Not terribly out of whack. Most stocks trade in the 10-20 PE ratio. Ratios above 20 tend to be hype (IPOs) or based on huge growth industries in their infancy. Stocks under 10 tend to be stable industries or declining ones (Exxon, Microsoft).
I say that a PE ratio of 16 is in the fair (not good, not bad) range for AAPL.
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P/E ratio is orthogonal to price per share.
Yes, I know you can calculate P/E by taking the price per share and dividing by the earnings per share, but that's because performing that operation causes the "per share" parts to cancel and it's just the entire price divided by the entire earnings.
AAPL shares can sell at virtually any price and have a 16.3 PE ratio.
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That is simply not the case. At least not as simply as you stated it. No matter how you calculate it, if share price goes up and earnings go down, the ratio will go up. In the case of Apple, I suppose your statement is true (but not precisely so) because their earnings growth will keep their ratio near or below that figure, regardless of realistic increases in share price.
Two Words (Score:2)
Many more have wondered... (Score:2)
... why people continue to buy the stock when Apple pays no dividend. Apple's stock price *has* to rise indefinitely at a rate that produces a useful return as a consequence. That's not sustainable for ever and arguably Apple's stock is significantly overvalued because the only way to make money from it is to turn a blind eye to that sustainability. Apple, I imagine, will eventually pay a dividend and its stock price will adjust as a consequence without significantly altering the return to its stockholders.
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Why can't the growth be sustained? Even if it can't dividends would not help investors in th extremely Lon term (like you are discussing). If growth becomes less spectacular, they can pay a dividend. There is no need to now. It would reduce the stock price and give investor a taxable event. Who wants that?
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Re:one other reason (Score:4, Funny)
Um, I've got some news for you...
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GP is claiming that speculators gambling on what other speculators will later pay have driven the stock price up 30 times over what they would be worth to someone who was simply investing in the company itself.
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Re:one other reason (Score:5, Insightful)
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Apple has a market cap of $382 billion and $70 billion in net asset value, so even if they appointed a no-talent ass clown like Michael Dell as CEO and he immediately liquidated everything, they're less than 6x overpriced.
I think it's pretty obvious that being 30X overvalued is an exaggeration. The trouble is that the industry they're in is extremely fickle. For example, say Samsung wins their case against Apple and gets an injunction in all the major markets against the iPhone. Or suppose a Chinese manufacturer takes an Android license and gets into the mobile device market, and then drives the retail price for iPhone-comparable devices down to $100. Apple could lose half their revenues practically overnight.
And the fact th
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For example, say Samsung wins their case against Apple and gets an injunction in all the major markets against the iPhone.
I suspect that's quite unlikely... but if so, you'd probably see a large payout by Apple (which with $70+ billion in cash is likely possible). Apple might fight a judgement via appeal, but an actual injunction against iPhone would be settled, and quickly.
Or suppose a Chinese manufacturer takes an Android license and gets into the mobile device market, and then drives the retail price for iPhone-comparable devices down to $100. Apple could lose half their revenues practically overnight.
Seems highly unlikely. iPhone is only $199 on contract, or do you think that a Chinese manufacturer is about to equal the iPhone build quality, and incorporate the long battery life, multi-core CPU, high DPI display, best of breed touch screen and stick 16g
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The other reason they're not part of the Dow is because Apple is overvalued by about 30x.
Apple has about 10% of its market cap in the bank as cash. With that said I'd be happy to buy any $20 bills you have in your wallet for $2 each.
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Re:one other reason (Score:5, Interesting)
They have $69 Billion in equity, $23 billion in annual income (generously taking the four most recent quarters), and market cap of 382 Billion. That means it would take 13.6 years of income, at present rates (which are MUCH higher than historical rates) to break even. Around 207-230 Billion would be a fairly safe price, assuming they can keep up this level of income--and is a tad under 60% of their current market value.
They're not overvalued by 30x -- that would imply they were worth $12 billion, and their equity alone is better than five times that. But they are overvalued by at least 20-30% from the standpoint of a prudent investor.
Re:one other reason (Score:5, Funny)
Although come to think of it, being overpriced has never bothered Apple in the past. :)
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They're not overpriced, it's just a convenience fee on their stock price for investors who have the good taste to buy iStock.
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Yeah, but dang it, I can get HPQ or DELL stock for under $25!
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What discount rate are you using?
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nominal, i.e. zero. I'm leaving in some big margins, though. Straight 23 billion by six years or so, plus some leeway.
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Sure, their income is higher than historical rates - that in no way precludes their income going even higher. Remember that they're doing this in a recession - when we come out of this recession in 2 or 4 or 8 years, who knows how much money people will throw to get the latest iphone and/or ipad?
Investors are simply betting on that eventuality. Of course, if that was a certainty, the price would no doubt be even higher than it is.
My point is, it's ridiculous to say they're overvalued by a factor of 30, b
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Of course it's an opinion, but it's based on fact. If we had perfect information about valuation and it weren't just an opinion, then nobody would buy or sell stocks. In the real world, we have imperfect information and uncertain results. My definition of a prudent investor here may differ from someone else's.
Investors are betting on the possibility that they are undervalued, and one justification for that POV is they believe it will continue to increase. To my mind, that's far from prudent.
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Um, Jobs hasn't been CEO since January. But please, go on reassuring people not to "worry," because Steve Jobs will die.
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More likely the volatility.
The DJIA is supposed to be made up of 30 companies that are 'representative' of the health of the market as a whole. Put one stock in with too much volatility and all the indexes derived from the DJIA will go berserk.
You could put a $5/share stock in there that would grow 100% per year and do just as much damage. OTOH, put Berkshire-Hathaway A in (about $101K/share today) and things would be much more stable.
Re:Stupid algorithm (Score:4, Informative)
Congratulations. You've just discovered why there are dozens of S&P 500-based mutual funds, but there aren't really any DJIA mutual funds.
Dow's whatever a SPDR can (Score:3)
there aren't really any DJIA mutual funds.
There is DIAMONDS (DIA) [amex.com], a SPDR exchange traded fund [spdrs.com] that tries to track the DJIA.
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Bingo. This is quite possibly the stupidest way to run a stock index and the stupidest reason for leaving a business off the top 30.
Anyone in software or engineering who heard that excuse would smack the manager who said it, and say, "Um ... so change the weighting of Apple? So that the value of Apple's component is continuous with that of whatever company it replaced at the time? You do realize that the share price is just a meaningless number determined by the arbitrary choice of how many shares are in
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The Dow is only relevant because it's the oldest general-purpose stock index in the US, and everyone is used to it. (The oldest index was the Down Jones Transportation Index, but that's a little sector-specific.) It's handy for headlines, but not much else.
Really? Why? (Score:3)
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You need a new dictionary. Industrial means pertaining to industry, and there is no definition of industry would exclude Apple. http://dictionary.reference.com/browse/industry [reference.com]
I recognize you think industry means manufacturing (which it doesn't). Even I it did, you would still be wrong. There is nothing about paying another company to fun the lines that would make Apple any less of a manufacturer.
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*yawn*