Investment metrics are employed by financial analysts to quantify both upside potential and downside risk, tipping the balance in favor of the investor. These metrics are used to measure the performance of a single company, establishing support and resistance levels, for example. They are used to measure sector activity and, within the global economy in which we all function as investors, metrics are used by analysts to determine macro-trends.

Market investments in almost all traditional markets have sustained losses in recent quarters. With the S&P 500 down 6% YTD and the commodities markets choppy, investing in other-than-mainstream companies adds increased diversification and puts some portfolio assets in smaller firms that are not dependent on daily fluctuations in oil prices or record prices for corn, wheat and precious metals.

This morning’s good news – good news, mind you – is that oil closed below $123 the barrel in the first time in months. Scary. Just a few months back, we all feared $80 a barrel oil. These are, indeed, interesting times.

The reporter who announced the “good news” went on to state that “investors were hoping for a further drop in oil prices” now that the Federal Bank had announced that there’d be no more rate cuts for a while. The dollar goes up. Oil and other bell-weather commodities drop in the trading pits and the longs are crying while the shorts are laughing all the way to the bank. The drop in oil prices creates ripples in the global economic pond.

Hope, however, is not a strategy for success. Research and the accurate evaluation of stock metrics – in a global market – is required for long-term, individual success. Here’s the problem. 

Using Investment Metrics – Analytic Expertise and Biases

Metrics are data. Numbers. Useful in quantifying what has already occurred within a particular investment sector. For example, recently released data from the real estate sector indicates that prices for existing homes fell 17.9% in the first quarter of ’08. That’s easily quantifiable.

However, data is only a useful tool. A starting point for expert analysis. How financial metrics are evaluated and implemented into wealth creation strategies is where experience and expertise come to the fore. Data must be contested, correlated with “on-the-ground” activity, classified within an unbiased taxonomy and, finally, integrated into an actionable course of investment.

Of and by themselves, the numbers are useless. It is the insightful analysis of investment metrics that delivers the best returns with the lowest risk. And in today’s global economy, the professional investor is well-advised to think globally with regard to portfolio holdings.

Analysts bring their own investor biases to their evaluations of market metrics – especially on a global scale where thousands of small companies are traded in smaller markets. Show the exact same chart to five different analysts and you’ll get five different interpretations of the exact same data.

That’s why I always remain skeptical of numbers alone. We’re all looking at the same metrics, operating in the same global economy, yet opinions on the future of a company’s prospects vary widely based on incorrect assumptions, faulty logic or the imposition of a “buying and selling system” template on economies that have never been here before!

Investment metrics – the numbers that are a part of each day’s trading information regarding a particular stock – are open to broad interpretation by investors. Remember that the next time a technical analyst puts up a chart and proudly proclaims that “this company is through the moon in the next six months – just look at that perfect double bottom.”

The usefulness of charts and metrics is a coefficient of the individual reading the data. Numbers are great tools but metrics must be properly interpreted within the global market in which we all operate.

Without quality, unbiased assessments, all metrics are useless. Data are just numbers.

A combination of metrics supported by company fundamentals is the surest means of arriving at well-considered buying and selling decisions.

Tim