Is Apple The Most Important Stock On Earth?

| About: Apple Inc. (AAPL)

Summary

Apple has been called "the most important stock on earth".

Due to its large market capitalization, this seems like a reasonable suggestion.

Yet, it's important to be cognizant of at least four mitigating factors related to the relative importance of a holding.

Recently, I came across an article that referred to Apple (NASDAQ:AAPL) as "the most important stock on earth." Given that the company has the largest market capitalization of public companies - call it $675 billion - that seems like a reasonable statement to make. This is especially true if you are an index investor holding something like the SDPR S&P 500 Trust ETF (NYSEARCA:SPY). AAPL comprises 3.6% of the passive fund's holdings - roughly the combined weighting of Exxon Mobil (NYSE:XOM) and Procter & Gamble (NYSE:PG).

Moreover, you don't have to hold the SPY specifically. Most S&P 500 or large-cap weighted portfolios would likely lead to Apple as your largest position. In this sense, "largest holding" can easily be translated to "most important." After all, a 1% share price move in this particular security would affect your portfolio greater than a 1% move in any other security.

That said, it's important to be cognizant of the relative frame of reference. Sure, the 1% example holds. However, in context, it might not be that big of a deal. Here are four potentially mitigating factors as to why AAPL (or any stock really) might not truly be the "most important."

Relative Size

In SPY, if AAPL's price moves by 1%, this influences your holdings by 0.036%. A 10% move results in just a 0.36% effect. Once you reach a point of wide diversification, even your largest holding doesn't materially alter your investing outcome. It's the combined production - in this case, the combined profitability of the largest businesses - that matters.

If Apple went bankrupt tomorrow, that would be seemingly devastating news for "the most important stock on earth." Yet, it's not going to crush you. In fact, depending on the profitability of the rest of your ownership claims, you could very well have a positive year. Expressed differently, 3% or 4% of your portfolio could routinely turn in negative 100% results, and you would still be making more money each year. So sure, Apple is an important holding for many, but if you have a diversified portfolio, it's not like you have to lose sleep over a temporary 5% share price decline.

Differing Goals

The second thing to consider is that "most important" is being ascribed based solely on market capitalization. This is fine if all you care about is price movement and arbitrarily weighting your portfolio towards the largest companies. (Although, as I just demonstrated, even this doesn't make it a huge event). Yet, there are numerous instances where this simply doesn't hold. Not everyone cares, or at the very least primarily cares, about stock price movements - especially in the short term.

Instead of share price movement, perhaps you're more focused on income generation. Over the past 12 months, Apple has paid out $11.126 billion in dividends. During that same time, Exxon Mobil made payments totaling $11.394 billion. In other words, Exxon Mobil was "more important" over that period if your frame of reference is income received. Some might suggest this isn't a big difference - just 2.4% more income paid - but don't lose sight of the idea that this represents hundreds of millions of dollars.

Incidentally, this works on an income per dollar-invested level as well. Even if you hold Apple and Exxon in proportion to an S&P 500 fund, say $1.57 of Apple for every $1 owned of Exxon. This means Apple presently pays $0.026 for each $1.57 owned, versus $0.0293 for each dollar of Exxon held. This is especially important once you get away from the idea of arbitrary portfolio weighting. Equal weighting favors Exxon (or hundreds of additional companies) over the intermediate term.

Other Important Metrics

A third reason why Apple might not be the "most important" stock develops if you move outside of the realm of thinking about returns. For instance, if you searched for "largest employers," Apple wouldn't show up in the top ten. For people concerned about jobs, it'd be easy to make the case that Wal-Mart (NYSE:WMT) or McDonald's (NYSE:MCD) is vastly "more important." This idea holds for a variety of other ideologies as well.

You Don't Own It

Finally, AAPL certainly wouldn't be the "most important stock in the world" if you don't partner with the company. The most important stock in your world is your largest holding. But again, the same caveats as above apply. It's important only in that you view it as important, or that you're looking at specific metrics.

Hypothetically speaking, if Target (NYSE:TGT) made up 20% of your portfolio, you'd be highly interested in the dynamics of that business. You still might not care about the stock price, but you'd definitely be interested in the sustainability of the dividend payments and the long-term underlying earnings power of the company. This is when a stock becomes important - when it represents an outsized portion of your success. Three or four percent of your portfolio might not have a lingering effect, but 20% sure could.

On the other hand, if TGT made up just 2% of your portfolio - along with 49 other holdings - it's likely this holding wouldn't be the "most important." Other companies would probably generate more income, have greater price oscillations and things of that nature.

Incidentally, this idea of "most important" can be a principal construct. When it comes to the "right" number of holdings, there are two basic schools of thought: hold enough stocks so that one doesn't greatly affect your day-to-day life, or else "keep all of your eggs in one basket, but watch that basket closely." Both might work out for you. The important part is realizing how you would react to certain circumstances.

If you have an outsized portion of your wealth tied to one company (as in the 20% Target example), this could work out great for you. On the other hand, it might not work out at all - if you're prepared for this, great. If, instead, this causes you angst, then you have two options: trade a portion of this outsized position for another, or treat the dividend payments as opportunities to redeploy capital elsewhere.

I don't own AAPL, so it is definitely not the "most important stock on earth" to me. Aside from the potential for some secondary effects toward my other holdings, I don't care if the business or stock goes up, down or sideways. Actually, a low enough price could very well entice a partnership decision in the future. That's me, personally.

Even if AAPL is your largest personal holding - whether via an index or by active decision - consider that "most important" might sound a lot more important than it actually is. In a portfolio of 50 or 500, the overall profitability of firms at large is likely to be much more impactful than a single company.

Disclosure: The author is long MCD, WMT, PG, TGT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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