The financial media isn't your friend [plus 2 ways it impacts returns]
Whether it’s the print media...
(Think weekend money sections or investment magazines)
Or their online equivalents...
There are plenty of places high-net-worth investors can find advice about investing.
But although there are some excellent personal finance journalists out there...
Consumers of financial media should exercise extreme caution.
Maybe even ignore this type of journalism altogether.
William Bernstein wrote this in his book, The Four Pillars of Investing:
“99% of what you read about investing in magazines and newspapers, and 100% of what you hear on TV, is worse than useless.”
That might sound harsh, but in fact, it’s accurate.
Let me explain.
There are principally two ways the media has a negative impact on investment returns.
1. Products which tend to get written about are often just the products you ought to avoid.
The interests of the journalist, and indeed the publication that he or she works for, are not necessarily aligned with your own.
For a start, most of these publications would not even exist were it not for advertising from the big asset managers and fund retailers.
The industry is all too aware of the benefit of having journalists write in positive terms about its products.
So, for instance, it funds glitzy awards nights where the winners are often the journalists and publications who’ve been the most “on-message”.
It also offers journalists expensive lunches, tickets to sporting events and even overseas trips.
How much impact all this has in practice it’s very difficult to say.
But it does raise important questions.
However principled individual journalists may be, however determined to protect editorial independence, it’s very hard in the real world to bite the hand that feeds you.
There is however another, and perhaps even bigger, conflict of interest to consider.
The media relies on the fund industry not just financially, but also for the stories it provides.
Without it, there would be precious little to write about.
Let’s face it, recommending every week that readers simply buy and hold a widely diversified portfolio of low-cost index funds is not a great way to boost circulation.
The fund industry knows the media has an insatiable demand for news and comment, and with active fund management, there’s always something new to write about.
New funds, new managers, new trends...
Fund houses pay PR agencies to produce a steady stream of “stories”...
Many of which end up in print.
Some appear to have been cut and pasted from a press release.
2. The media, consciously or otherwise, stimulates unnecessary activity.
It encourages investors to act when, for investors with an appropriate plan in place, the best thing is almost invariably to do nothing.
Even now, with the coronavirus outbreak, the best investors are doing nothing.
Probably the biggest offenders here are the financial television news channels, which tend to appeal to viewers’ emotions.
Simply watching the likes of CNBC and Bloomberg, for example, can make us want to buy when markets soar and sell when they plunge.
Another problem is that channels such as these love their pundits.
People who claim to be able to forecast future price movements, and to spot which stocks, sectors and funds are likely to outperform.
But the evidence shows that the track record of these pundits is dreadful, and that all such tips and forecasts are best ignored.
Print journalism, though, can be just as harmful.
One of the reasons for this is that journalism generally (not just financial journalism) tends to focus on bad news rather than good news.
As Bill Gates once said:
“Headlines, in a way, are what mislead you, because bad news is a headline, and gradual improvement is not.”
Over that period, markets around the world have typically risen by around 250% or even more.
And yet for eight years we’ve had an almost incessant barrage of bad news.
The debt crisis in Greece and the threat to the euro.
Fears that Deutsche Bank may be another Lehman Brothers.
Worries about a hard landing for China.
The uncertainties created by Brexit.
The election of President Trump.
Each has been cited as a reason to sell (or at least not to buy) stocks, and yet looking at the data, those who acted on that news lost out on huge potential gains.
Batnick then lists several positive developments which have contributed to the bull run and yet, because they were gradual, generally didn’t make the headlines.
Advances in medicine.
The growth of airline travel.
Greater fuel economy for cars.
Solar energy becoming a viable option...
And a combination of greater transparency and falling costs in the investing industry.
In conclusion he says this:
“The fact that bad news is disseminated ten times as fast as positive news is one of the biggest reasons why it’s so difficult to just capture market returns. It’s as simple as buying the total market index fund and leaving it alone (and yet) it certainly isn’t easy, because bad news smashes your face against an amplifier, while good news just plays quietly in the background.”
To an unsuspecting investor, the financial media may seem like a friend, but often it isn’t.
Read the financial pages but remember to think very carefully before acting on anything you read.
As for CNBC, it’s probably best ignoring that altogether.