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Shire Proves Einstein's Theory of Relativity

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The share price of Shire PLC (LSE:SHP) rose by more than 7.0% today before closing at 4,927.00, 6.9% higher than yesterday’s close of 4,609. In fact, Shire shares sank to 4,592 in early trading, before soaring substantially at 11:00 a.m. to 4,949.00. Shire was one of only 371 gainers on the London Exchange today versus 844 losers and 841 companies’s shares that remained unchanged.

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The sudden surge came subsequent to Shire’s statement that it expects to resubmit a “potential blockbuster” drug that had been rejected by the USDA earlier this month. The rejection was not outright, but the USDA did ask for more substantive data. The success of the new medication, lifitegrast, “is a key plank in Shire’s ambition to increase sales to $10 billion by 2020 from around $6 billion currently. Analysts have forecast that peak annual sales of the drug, which is the first (ever) shown to relieve the symptoms of dry-eye disease, could hit $1.5 billion.”

In a separate statement Shire CEO, Fleming Ornskov, said that, “We have a very attractive package to refile with the FDA.” He also indicated that news of a successful submission should also enhance his company’s efforts to acquire U.S.-based competitor, Baxalta (NYSE:BXLT). Baxalta shares rose by as much as 3.0% following the news.

What Has This Got to Do With Einstein’s Theory of Relativity?

EVERYTHING.

I doubt that Einstein would have ever been a day trader. He studied approach to how things work in this universe would have compelled him to make long term investments and to think more than twice before buying or selling based on the latest headlines.

The fundamental assumption of the theory of general relativity is this:

“Every time you measure an object’s velocity, or its momentum, or how it experiences time, it’s always in relation to something else.”

Shire’s share price is a perfect example of how that works outside of the science lab. Yesterday’s headlines reported that Shire shares slumped after Credit Suisse had cut its target for those shares. Shire shares succumbed.

Today’s headlines are reporting the dramatic increase in Shire’s share price, as we have just shared.

The Application of General Relativity for Successful Investing

The decline in share price yesterday was measured against only the price the day before. The increase in Shire’s share price today was measured only against yesterday. The relative significance for the average shareholder, therefore, should be insignificant.

The significance of any change in any share price for an investor should be against a more long term indicator. My thesis is this: The primary indicator for the relative value of any company’s share price is how today’s price compares with when I acquired those shares.

If I were to acquire shares on Monday and the share price drops on Tuesday, I might consider my self a loser. But if I held on to them – for whatever valid reason – and they regained what they had lost, plus more, I might consider myself a winner. If I continue doing this day-by-day comparison, it won’t be long before I am going bonkers. I won’t know who I am, what I am, or why I am.

However, the more days that go by the better the perspective one has on their investment. If I had bought Shire any time between March and August of this year, I might be concerned about the long term outlook. But, if I had bought it last October (2014), I would be content with the relative gains I had made. And I would not be as emotionally involved as my short-term trader friends.

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