“When you’re courting a nice girl an hour seems like a second. When you sit on a red-hot cinder a second seems like an hour. That’s relativity.” ~Albert Einstein
The tendency to judge a number on absolute terms, rather than relative terms, is the single biggest mistake I see investors make day in and day out.
I just don’t understand it.
Everything is relative!
Don’t believe me?
Bang your left thumb with a hammer the next time your right thumb has a hangnail.
In the markets there are two “relatives” all investors should consider before assigning qualitative labels, like “strong or weak” and “good or bad,” to anything financial.
The first is “relative to comparables.”
You shouldn’t compare the profit margins of Bank of New York Mellon (55%) and Amazon (0.1%). The two companies run completely different business models.
Instead, Amazon (0.1%), Overstock.com (1.9%) and Ebay (17.7%) make more worthwhile comparisons.
The second is “relative to trend.”
Ebay, for example, has suffered a 19% decline in earnings-per-share (EPS) this year. That’s a short-term, negative deviation from its five-year trend of increasing EPS by 51%.
On the other hand, Salesforce.com, which also suffered a 17% decline in EPS this year, is merely continuing its five-year trend of declining EPS by 70%.
That’s the value in making relative comparisons. And this morning I found a chart that I absolutely love. Its keen construction of global data relies on two relative comparisons. The result is a normalized and highly-instructive view of stock markets around the world. Check it out:
The author of this chart, Scott Minerd of Guggenheim Partners, made two calculations:
Then, taking the resulting value from Calculation #1, Scott made a “relative to trend” calculation, as such:
All told, this data construct allows for many inferences. Like Turkey, which has one hot stock market. And Russia, which has an ice-cold market.
I have a number of things to say about this chart and what each country’s data means to investors. But after pounding my “all things relative” bent into you… I’m out of space for today.
Stay tuned for more of this analysis – country-by-country – in upcoming issues.