Tuesday, April 10, 2012

Prosper By Ignoring The Financial Press

Why The Financial Media Is Worse Than Useless And How You Can Profit By Shutting Off The Television

Pretty much every day when the equity market moves - be it up, down, or barely at all - the financial media feels compelled to come up with some explanation as to why the market did what it did.  Explanations can be fairly direct, such as attributing a move to economic data, or they can be (to be polite) rather esoteric, as is often the case when the market moves significantly in the absence of a clear driver.  On days like today when there are big moves in the market the financial media usually ups the ante by shrieking about the big move, interviewing guests with a series of panicky questions, and even going so far as to highlight the equity ticker they flash on the screen with highway safety yellow just in case you failed to notice the big move.  Yes, CNBC and Bloomberg, I am talking about you.  All of this is quite laughable.  The media generally has very little idea of what is driving markets and all the histrionics on days of big up and down moves simply serves to help make the more impressionable investors more enthusiastic on the up days and more pessimistic on the down days.  I think wise investors will make limited use of the financial media and can actually profit by largely ignoring it.

It is, of course, important to be aware of what is happening in the world and the markets.  For that reason, we are compelled to make some use of the financial and general media.  After all, they do report the news and internet and television allow us to get the news in real time.  The problem is that the people within the media are people (and salespeople).  As a result, whatever facts they report are inevitably colored with the emotions they carry and frequently include a dash of spin aimed to drum up more viewers (they are running businesses, after all).  So instead of relatively dispassionate reporting of facts, we are treated to a deluge of (often conflicting) strong statements, judgements, and maybe some facts tossed in for good measure.  Bad news sells especially well, so the financial media often harps on the negative side of things to get as much attention as possible.

Unfortunately, we as investors suffer from interference from our emotions even before we turn on the television or type in a URL.  Pick up any book on behavioral finance (a fascinating topic) and you will quickly find that the human brain developed under evolutionary circumstances that did not include investing.  As a result, we are hardwired to fall prey to a number of common mistakes over and over.  The only remedies appear to be either lifelong awareness and training, or utilizing "mechanical" investing vehicles (such as target date or balanced mutual funds) that take the emotion out of investing.  When we start paying attention to the braying of the financial media it becomes far more challenging to avoid being ruled by your emotions.  It is normal to have a visceral reaction to emotionally charged messages.  We are communicative herd animals as human beings and in ages past the person who did not pay attention to cries of alarm from other members of his tribe often became the victim.  As a result many people listen closely to the financial media, start making emotionally driven decisions with their money, and do themselves a lot of damage.

So how can we as enlightened investors avoid this trap and maybe even take a bit of advantage of the situation?  First, everyone should use some self control and limit their exposure to the financial media.  If there is a particular interview worth watching then watch it, but don't leave CNBC or the Bloomberg channel on all day.  Second, unless you are actively trying to buy or sell something on a specific day at a price, don't constantly check the markets or the prices of your investments.  It is unlikely that things will move much intraday and by constantly checking you will getting more unnecessary exposure to the financial media.  In this respect, traditional mutual funds have an advantage over ETFs: you only see one price change per day.  Third, when you are doing due diligence into a potential investment or reading the latest press release or SEC filings from one of your existing positions, stick to the facts.  Especially in the case of deep value plays (which are values because people hate the company), the financial media will inevitably play to the prevailing negative sentiment about a company and often obscure the actual facts.  Similarly, a market darling will usually have nothing but nice things said about it regardless of what actually is happening at the company.  With all of this swirling around, it is easy to take a ride on emotions and get swept away from the facts.  Ignore the slant and make your own decisions.  Finally, when you hear a universal drum beat from the media (pro or con), pay attention.  The press usually does this when sentiment is overwhelming and wrong.  The contrarian bet is most often successful.

Most of the time, the correct choice is to do nothing with your investments.  You presumably spent a lot of time and energy choosing what you own, you monitor it to see if things are going as expected, and you have a time horizon measured in years or decades.  In the vast majority of cases, reacting to short term changes or the panic du jour as trumpeted by the financial media is precisely the wrong choice.  Keep calm and carry on.

As always, do your own due diligence, consult your advisor, and be careful.  Maybe CNBC really DOES know it all and I am mistaken.

No comments:

Post a Comment