Meaningful Returns

The business headline in today’s Wall Street Journal reads: “Apple Value Surges to $1 Trillion.” And “What does it mean,” wrote Matt Levine today, “that Apple is worth a trillion dollars? I think there are two possibilities:

1. The consensus expected future cash flows to Apple shareholders have a present value of $1 trillion; or
2. Other

You should not completely neglect ‘other.’ There is something self-referential about corporate valuations, and I do not think it is ridiculous to believe some version of the idea that a company is worth a trillion dollars because it is worth a trillion dollars, and not because shareholders have a rational model of the expected future cash flows and those flows happen to add up to a trillion dollars.”

But I’m not here to talk too much about Apple today. There are plenty of other places you could read about the company’s incredible journey, how Michael Dell said in 1997 that Apple should “shut it down and give the money back to the shareholders,” how it went on a string of incredible innovation with the release of the iPod, iPhone, and iPad in relatively short succession, and how it continues to reinvent itself today.

What I want to hone in on really briefly is this idea of valuation. As Levine hints in his typically cheeky way above, valuing a company is a squishier proposition than those of us in the world of finance would sometimes like to admit, but is at least in the realm, as it were. I mean, the valuation of a company at least is something that makes sense in context–the company makes a thing or does a service, those things and services are sold with some level of profitability, and you can use math to come up with an estimate of how those levels of profitability will move into the future and then back into the present value.

But where we can often get into trouble is taking the concept of valuation–that is, literally, expressing the worth of something in dollar terms–and applying it in ways it has no business being applied. And if we’re not careful, the financial planning process is one of those areas where we get into that very trouble.

See, on one level, financial planning is very much like the valuation of a company. We’re taking all these “expected future cash flows”–the college tuition for kids or grandkids, the living expenses during retirement, the travel you intend to do, the charitable giving you plan to undertake–and we then use some sophisticated math to turn all those cash flows into advice about how you should save and invest and otherwise orient your current cash flows.

And all of this is fine. It is good, even, to the extent it adds clarity and reduces worry in people’s lives. But what financial planning ought never do, and what we at Beacon hope it never does, is begin expressing the worth of the invaluable in dollar terms.

It turns out there are a lot of invaluable things in our lives. People for one, and Time for another, and everything else that is Good. Vocations we love, homes we open, rest we take, meals we share, help we give and receive–these are all things that we want clients to focus their lives on. And here’s the key, the importance of financial planning will always be that it is a tool to enable you to actually focus less on things that can be valued, and more on those that can’t.

The business headlines at the Wall Street Journal are never going to focus on stuff that can’t be valued. “Apple $1 Trillion” will always trump “Smiths Eat Dinner Together Five Days In A Row” or “Local Man Takes Pay Cut On Purpose” or “Founder Provides Health Benefits To All Her Employees.” But our hope is that our clients make the headlines that never make the headlines, and we’re thankful for the small part we play in each one.