“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:

See larger image

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.

Your Special Boom & Bust Offer!

Investing is no longer a set-it-and-forget-it affair. If you’re still using that outdated approach in today’s irrational markets, you’re setting yourself up for massive losses and a difficult retirement. There’s a much… Read More>>
Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.