In your mind, envision a perfect circle. Like a pie chart that hasn’t been divided into pie slices yet. Just a big, plain circle. Maybe it’s blue.

Now, envision three of those in a row. Next, envision 10 of those in a row. Then, envision 100 of them in your range of view. They probably don’t fit in one row; they are now stacked in rows of ten on a page or a computer screen. Each pie chart is reduced in size to a dot. Now, go back to your first vision of just one pie chart. Consider the difference in the size of the circle you envisioned relative to the number of circles you had to fit into your range of view.

This is an example of how to apply weight to a fundamental metric relative to the size of the company we are analyzing. It’s a method called Fundamental Metric Relativity, though, in a traditional sense, that method measures one company’s metrics relative to a comparable company’s metrics. While that’s a valuable method, it’s less useful than measuring how each metric matters in relation to each other within a company and how much weight each metric holds relative to the size of the company. We can use these metrics and their relationships to each other to determine whether a stock price’s trajectory should point up or down and to what degree.

Debt, for just one example of many, is an important metric, but in a large-cap stock, it is often engulfed within an operating margin. A company’s revenue can be so high, and its operating efficiency can be so high that debt bears less impact on the performance. However, a small-cap stock likely carries a higher ratio of debt on its balance sheet relative to a large cap, so its debt as a metric carries more weight. Debt has been expensive, while interest rates have been high. Interest rates should be decreasing, and that should make the cost of debt less burdensome for all companies. This will have a greater impact on a small-cap company than on a large-cap company.  Which small caps will be more impacted than others can be determined with other metrics.

Now, picture different pie charts in all different sizes together on the same page, and each chart now has pie slices of varying colors. See how a big orange slice of a small pie can be more significant than a small orange slice of a big pie. Not just its significance to the small pie it belongs to but its relevance to the whole picture. That’s Fundamental Metric Relativity.

If you enjoyed that exercise in relativity, you might enjoy this video that I always love. It puts our size into scope relative to the size of our universe, and, for me, it always serves as a mental reset button.