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Perspective

Peter Katevatis - Dec 03, 2015
I remember struggling in art class.  My teacher at Prince of Wales Secondary was thrilled when another “Katevatis” was in her class since my older sister was a prodigy and still makes a good living as an artist.  As the teacher (nicknamed Dragon Brea

I remember struggling in art class.  My teacher at Prince of Wales Secondary was thrilled when another “Katevatis” was in her class since my older sister was a prodigy and still makes a good living as an artist.  As the teacher (nicknamed Dragon Breath) realized the talent didn’t flow down the family bloodline, she was pleasantly surprised that I could draw using Perspective.

 

KWM-PerspectiveDrawing

A perspective drawing is much more geometry than art… but what do you expect from a math guy?

 

In the financial markets we are bombarded with news and data.  Corporate news, government data, commodity prices, interest rates, currency fluctuations and much much more are constantly being spewed out.  The key to digesting this firehose of information, is using perspective.

 

A great example of where you need perspective has been oil prices over the past several years.  As oil prices rose from 2010 until the summer of 2014 which led to a boom in Alberta, North Dakota, Texas and other oil producing regions.  News headlines in Calgary talked about rising prices and the massive increase in workers needed.  At the same time, news headlines in Ontario were very different.  From their perspective, oil prices were a drag on manufacturing and causing inflation concerns.  This led to tightening monetary policy by the Bank of Canada and a slowdown in several sectors of the economy.

 

When looking at market data, you need to have some perspective as well and take into account the time frame you are looking at.  Below is a chart of Royal Bank trading on the TSX for the past 3 years.  Canadians love holding Royal Bank as they have consistently generated positive returns over time.  As human beings we tend to focus on the bullish words such as “consistent” and “positive returns”, but the key word is “over time”.  In this case it is only 3 years.

 

Royal Bank - 3 Year Chart

 

The returns of Royal Bank have been even better if look over 5 years, 10 years and even 20 years.  However, if we change the perspective slightly and only look at the past 1 year, you get the picture below.  Suddenly, Royal Bank doesn’t look so rosy.

 

Royal Bank - 1 Year Chart

 

Perspective is used by many in the media to help add support to their theses.  I am quite proud to say Canaccord Genuity’s analyst team tends to be less promotional than others, except for perma-bull Tony Dwyer.  At least he’s consistent.

 

Now just for fun… I will take the same Royal Bank 3 year chart and add some arrows.  I won’t even say Buy Low or Sell High, it just becomes implied by the picture.  Amazing how small alterations can change the perspective.

 

Royal Bank - 3 year BULLISH chart

Royal Bank - 3 Year BEARISH chart

 

Next time you are reading the financial news (especially The Economist) look closely to see the extreme use of perspective altering techniques.  Reading and watching the news for information is very important, however you should draw your own conclusions.