Imagine you are engrossed in a very interesting book and your concentration is broken by a call from a friend (let’s call him Hobbes). It’s rather unusual to receive Hobbes’ call at this time during the day so, expecting to hear something urgent, you pick up the phone and ask him –
“What’s up, buddy? Is everything alright?”
“Dude, the stock that I bought last month has reported a decline in their quarterly profits by 50 crores! Is that a bad news? Should I sell it?” The panic in his voice is clearly evident.
What would you tell him?
As they say, the most useful way of answering a question is to ask another question in response. And in this case, you must ask Hobbes, “50 crores compared to what?”
“What do you mean ‘compared to what’? Isn’t 50 crores a huge number in itself?” You friend is little confused by your response.
The right answer is that the figure 50 crores needs to be considered in full context. The company’s profit declined by 50 crores but what’s the net worth of the company? Is the net worth comparable to 50 crores or is it something in the order of 10,000 crores? Asked in another way, was the profit decline almost 90 percent? Or was it less than 5 percent of the total profits, i.e. part of the daily noise?
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