People Don’t Understand Relativity

Few of us understand Einstein’s General or Special Theory of Relativity.  A quick survey tells me that not many people know there are two theories. Perhaps we are not naturally good at relativity. Who can win that game?

Not understanding Einstein does not matter much in terms of time dilation or curved space because we travel so slow and over such short distances that neither causes a serious distortion. Other situations matter though.

I came on this article recently and found it to be interesting in a relativistic way.  3 Charts that show market valuations are totally unprecedented.  The three charts are:

  • Market capitalization to GNP
  • Median price to revenue ratio of S&P 500 stocks
  • S&P 500 relative to M2 money supply.

You see the problem.

All of these are relativistic and the relationship is between two variables.

If I say someone is 180 cm tall, that is a relationship but to a standard. Height is relative to the centimeter and centimeters are always the same size. When I compare market cap to GNP I am comparing a variable to a variable and when I get a high number, I intuitively assume it is because market cap is too large.  It could be that GNP is too low, but how would you know?

If market cap is estimating the future, maybe the ratio means the market expects GNP to grow quickly and thus make the ratio “Normal.” How could you know?

If you live by current information, these things may matter but rather than have meaning, they are just part of the noise. You can go far astray following the static instead of the signal. Complexity sells and not much is more complex than relativity, in any subject. 

Neal Weintraub has a thought you should consider:

“You will run out of money before financial gurus run out of trading ideas.”

You will be wise to pay attention to the source of the information. Is it from someone who makes their living by purveying such information? If yes, then it will likely be more spectacular than truth requires. Like news. No one cares that nearly all homes did not suffer a burglary yesterday. It is the unusual that attracts us. Smart news people exploit that trait. Smart listeners know that and take it into account.

If you buy and sell based on market prices, there is no objective factor you can rely upon. It’s all relative to how others feel about the prices.

An awkward standard to implement.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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