On this day, March 14, in 1879, Albert Einstein was born.
You may know Einstein by his signature wild grey locks, E=MC², the first atom bomb, or this image…
Regardless of how you know him, you are familiar with the fact that he led an intellectual revolution that changed the way we consider certain things. This statement can even hold water in the financial world.
Einstein’s Theory of Relativity is crucial in the field of physics, but how can it be applied to investments? Maybe Investopedia can help us out…
“When considering the problem of gravity, Einstein encouraged people to picture a man in a box that is traveling through space at a uniform velocity. For example, Person A on earth and Person B in a rocket – unaware that he is in a rocket – will both draw the same conclusions about their planet’s gravity. When they drop an object, it falls toward the floor. However, if the rocket stops moving, Person B will realize that he is wrong – in the split second before momentum smashes him against what he thought was the ceiling.
This theoretical situation is easily extended to the stock market. If we imagine gravity as the true value of a stock (or the true worth of the company it represents) and the rocket as a shooting star (a stock with a value that quickly inflates without reference to the value of the underlying company) we can apply relativity to tell the difference.”
For more of the story, head over to Investopedia.