Apple and those LOL numbersFebruary 25, 2012: 11:18 AM ET
Now even the New York Times is misusing the "law of large numbers"
We can forgive the talking heads on CNBC for blathering on about mathematical "laws" of which they are totally ignorant. What do they know?
But when James B. Stewart, a Pulitzer-prize winning professor of business journalism at Columbia University writes about Apple (AAPL) "running up against the law of large numbers" in the New York Times, it's time for corrective action.
For the record, the law of large numbers -- once shortened to "LOL numbers" (as in "laugh out loud") by a wag in our comment stream -- has absolutely nothing to do with how big a company has grown.
First formulated in the 16th century and rigorously proven by Jacob Bernoulli in 1713, it states that the probability of an experiment -- the average roll of a die, say -- achieving the expected result increases the more times the experiment is performed.
What Stewart was really trying to say in an otherwise admirable article about Apple's astonishing record of growth since it reinvented the mobile phone in 2007, is that it's easier for a small company to double in size than a large one.
"Put another way," he writes, "to increase its revenue by 20 percent, Apple has to generate additional sales of more than $9 billion in its next fourth quarter. A company with $1 billion in sales has to come up with just another $200 million."
This is true. But as Evercore Partners' Robert Cihra points out in the next paragraph, analysts have been saying this about Apple for years. Yet despite the "law" they keep citing, Apple's growth has actually been accelerating.
Past performance is no guarantee, of course. But there is no law -- mathematical or otherwise -- that says that the world's most valuable company can't keep growing faster than its competitors. Especially when that company is in the business of disrupting one industry after another.
UPDATE: I've since learned that I was not the only writer bothered by Stewart's misuse of the law of large numbers. Horace Dediu pointed me to Tech.pinions' Steve Wildstrom, who references an "excellent takedown" by blogger Dr. Drang. I'm still looking for a good name for the rule that says a company can't keep growing forever at a pace that's faster than the economy.