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Monday, December 10th, 2012
about that paradox

I have written before about the ease with which the producers of charts (including me) can deceive, even if not trying to do so.  Some of the most common ways include picking a starting point for a chart that maximizes a particular point of view, using price instead of total return for longer periods, and putting lines together on a chart without comparing them on a percentage basis.  Today’s topic is an example of the latter.

In a given day, you probably see lots of charts with multiple axes.  Most all of them give you a distorted view of the world.  You might get an idea that something is going up when something else is going up — and down when it is going down.  That can be of interest, but multiple-axes charts, which are popular with investment professionals and bloggers, give false indications.

One example can be found in the top panel above, which was published by Zero Hedge with the title “The iParadox.”  The lower panel shows the same intraday information on a percentage basis.  One gives the sense that Apple has just diverged from the S&P 500 for the first time since the end of October.  The other gives an accurate representation.

AAPL is, of course, endlessly fascinating, not to mention maddening for portfolio managers who are at risk of having their investment process distorted by it, as I wrote about in April.

There are plenty of paradoxes to be found in the analysis of the stock and its market action — a look at the year-to-date action is below — but throwing things on a chart and letting the software line them up for you without a sense of magnitude probably will get you headed in the wrong direction.  (Chart:  Bloomberg terminal.)