stratechery
stratechery

Apple the Black Swan

Apple does everything wrong. They don’t do market research. They don’t segment the market with multiple models. They don’t have promotions. They don’t diversify. They don’t have divisions. They don’t have multiple P&Ls. They don’t pursue market share above all else. They don’t take on debt.1 They don’t pay dividends (or big enough ones, now). They don’t buy back their stock.2

They don’t make sense, especially to Wall Street (where today AAPL was pummeled yet again).

I believe the market thinks of Apple as a Black Swan: their success is so inexplicable, wrong even, that they simply have no idea how to value the company – in fact, they don’t even try.


The idea of a Black Swan was coined and popularized by Nassim Taleb, who defined a Black Swan as follows:

A Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

The most well-known example is the 2008 financial crash. Financial models didn’t account for the possibility, the impact was absolutely massive, and everyone today has a pet theory as to why it happened. In fact, it was the financial crash that truly made The Black Swan theory famous — and Taleb rich:

Mr. Taleb last year published “The Black Swan,” a best-selling book about the impact of extreme events on the world and the financial markets. He also helped start a hedge fund, Universa Investments L.P., which bases many of its strategies on themes in the book, including how to reap big rewards in a sharp market downturn. Like October’s.

Separate funds in Universa’s so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. “We’re discovering the fragility of the financial system,” said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.

However, Black Swans are not necessarily bad. Rather, they are highly improbable, often for the better. Taleb writes:

Think about the “secret recipe” to making a killing in the restaurant business. If it were known and obvious then someone next door would have already come up with the idea and it would have become generic. The next killing in the restaurant industry needs to be an idea that is not easily conceived of by the current population of restaurateurs. It has to be at some distance from expectations. The more unexpected the success of such a venture, the smaller the number of competitors, and the more successful the entrepreneur who implements the idea. The same applies to the shoe and the book businesses-or any kind of entrepreneurship. The same applies to scientific theories-nobody has interest in listening to trivialities. The payoff of a human venture is, in general, inversely proportional to what it is expected to be.


Wall Street is predicated on understanding probability. Every financial model makes ostensibly “reasonable” assumptions about the future, firmly grounded in probabilities. The less probable an event, the riskier it is, and the greater a premium for investing in it. Again, this swings in both directions: greater risk means a greater likelihood that you will make money, along with a greater likelihood you will lose it.

But there are some things that are so unlikely, they literally break the model.

Suppose there is a 90% chance that you will earn 20% on an investment, but a 10% chance you will lose it all. If you planned to invest $100, the expected return would be calculated as such:

($100 x 1.2) x 0.9 + ($100 x 0) x 0.1

= $120 x 0.9 + $0 x 0.1

= $108

Your expected return is $108. It’s a good investment, even if you might lose it all.

Now, what if your likelihood of success was 99.999%, but if the investment failed, you would lose $1 billion?

($100 x 1.2) x 0.99999 + ($100 x -10000000) x 0.00001

= $120 x 0.99999 + -$1,000,000,000 x .00001

= -$9,880.00

It’s a bad investment. The potential damage from the investment going wrong overwhelms the upside, even though the investment will in all likelihood not go wrong.

The problem is that all investments have the potential of going catastrophically wrong. What if the US defaults on its debt? What if there is a terrorist attack? What if? What if? Any model that properly accounted for every risk would be unworkable.

So the extreme events are ignored. That investment I just calculated? It’s expected return is modeled as $119.988. It’s not as if the 0.0001 is actually going to happen. It’s a black swan.


Apple has released three major products in the last 12 years: the iPod, the iPhone and the iPad. Each created a new market, and made Apple the most profitable company in the world. To Wall Street, such success is arbitrary. Sometimes a company happens on a hit, usually they don’t. Very rarely do they have two, and three is a .001% chance.

Apple’s string of success is effectively impossible. Yet it happened. They are a black swan.

Look at Taleb’s criteria:

  • It is an outlier — check
  • It carries an extreme impact — check
  • It is explained after the fact — in the case of Apple, the explanation is Steve Jobs. He was a genius, and now he is gone

And so, AAPL continues its downward descent; it was great to ride it on the upside, but now that Apple is a normal company, the probability of another hit are so remote, it’s best to assume it simply won’t happen.

This is the disconnect many of us in the blogosphere have with Wall Street. We actually believe that design matters, that taste is objective, and that culture can be developed. And, by definition, none of these can be measured or quantified — or modeled.

I’ll close with the same conclusion I wrote for “Apple and the Innovator’s Dilemma,” which examined in detail Apple’s approach. I think it’s apt:

Many will…despair at ever having a Steve Jobs run their company. But I believe that for all of Jobs brilliance, the secret of Appleʼs success is about design and a different way of thinking. Design at its essence, is not just about form, and not just about function. Instead, itʼs both, and more. It is ultimately about the user and delivering exactly what they need, not just what they say they want. Apple takes it as their responsibility — what customers pay them for — to both know technology and customers better than customers know themselves and deliver products that truly surprise and delight. And it is suprise and delight that builds a powerful and long-lasting brand that goes from success to success without any dilemma at all.

Moreover, it is a way of thinking that Apple does not have a monopoly over. It requires acknowledging that there are product attributes that cannot be measured, and that value means much more than money. It also requires thoughtfulness and patience, and a broad appreciation of people and culture. Escaping the Innovatorʼs Dilemma is about escaping the operational mindset that is the current ideal in much of business. In short, there are few other companies like Apple because no one dares or is allowed to think different, not because it is impossible.

But it is rare. Rare like a black swan.

  1. Strangely enough, it is always financially advisable for U.S. corporations to take on debt for tax reasons
  2. Update 5/15/2013: Obviously some of this has since changed; Apple took on debt, bought back stock, and increased their dividend. The broader point still holds