Statistics and comparisons are tricky especially when it comes to the stock market.
Optimists look for good news in comparisons while pessimists seek out the negative.
Your job as an investor is to make a reasonably judgment when looking at stock market performance.
That’s not always easy.
Each quarter, companies must report how they did in the month immediately following the end of the quarter – also known as earnings season.
This quarterly report card can send a stock soaring or pull the rug out from under it depending on the numbers.
Company executives and those who stand to gain by quarterly performance tend to spin numbers to prove a point.
For example, one of the most common comparisons is to look at the same quarter one year ago and seek if the company’s performance has improved or not.
This is where investors must use some critical thinking skills to put the numbers in context.
If the first quarter of the previous year was a disaster, then there is a good chance the first quarter of the current year will look good by comparison.
However, was the company’s performance really spectacular or just so-so, but when compared to an ugly past looks pretty good.
By the same logic, if a company had a record-setting first quarter the previous year, but just a good quarter this year is that a reason to dump the stock?
When it is time to decide whether a company has done well or not, look at more than a year-to-year comparison.
Look at the company’s competitors. Did they have a great quarter, while the company you are following didn’t?
How did the company’s industrial sector do?
These types of comparisons often mean more than looking at year-to-year comparisons.
Put numbers in context and they will serve you well. Fail to look beyond the obvious and you may be sorry.
