Wednesday, February 12, 2014

1929 Crash: Charts That Mislead Investors

A few questions have come up regarding the similarity of today's market chart pattern relative to the chart pattern in 1929 just before the crash at that time. The chart that has been circulating is similar to the one below that was created by Ryan Detrick, CMT of Schaeffer’s Investment Research, Inc.

From The Blog of HORAN Capital Advisors

However, Ryan included another important chart that investors should view in conjunction with the above chart. His second chart displays both charts on a percentage change basis. When looking at this second chart below, one sees a very different picture of this market vis-à-vis the 1929 market.

From The Blog of HORAN Capital Advisors

The Wall Street Journal's sister publication, MarketWatch, contained an article yesterday that displayed only the first chart. The MarketWatch article does discuss the percentage change chart; however, in my opinion, places more emphasis on the first chart above. Evaluating data from a percentage change perspective is critical in our view. For example, a company that grows earnings from $1 to $2 per share has a 50% 100% increase in earnings growth. A company that then grows earnings from $10 to $11 experiences a 10% earnings growth. All else being equal, both increased earnings by $1; but, what company would an investor rather own?


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