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Although innate biases lead to irrational investment decisions, external levers influence our investment behavior as well – none more so than the financial news media. When seeking information to help your odds of investment success, know the difference between entertainment and sound advice.
Professional investors don’t rely on CNBC
Professional investment firms tune into financial news channels like CNBC for background noise and atmosphere, rather than as sources for actionable information. By the time the financial news media broadcasts a headline that might actually have market impact, the professionals have already received that information using more sophisticated methods.
For example, most investors monitor major economic news and indicators by subscribing to real-time news services. High-frequency traders go many steps further. Their algorithms are plugged in directly to news sources, parsing the feeds for actionable data that automatically trigger buy and sell orders. These market participants react in milli- and micro-second time frames. By the time you blink, a history of trades has already taken place. The few seconds of lag time it takes for economic news to traverse to CNBC is an eternity in the high-frequency trading space.
If CNBC doesn’t help you in the short-term, what about watching to gain an advantage for longer-term market insight? Well, to test whether there is value from watching CNBC at all, pay attention to the markets. If the content on CNBC was useful, then the markets would react.
In actuality, the markets don’t care what anyone says on financial news channels. The conveyor belt of guests and influencers are ignored. Most talking points are about events that have already happened, and opinion pieces are irrelevant. For example, Jim Cramer’s recommendations have no market impact; there is no Cramer “bump” in the prices of those securities he recommends. This not because the markets are stupid. Quite the contrary; if there was any value to the content on those shows, the markets would take notice. The reality is that hyper-competing market forces are too efficient to rely on CNBC.
If the professionals don’t rely on these financial news shows, why should you?
The financial news media is entertainment
When you follow financial news channels, you are motivated to try and outwit the markets by speculating and trading. Frequent portfolio turnover happens to generate higher commissions and advisory costs, draining wealth from your pockets to your broker and financial advisory firm. Not surprisingly, most financial news media advertising dollars come from firms that make money when you trade and speculate.
The financial news media does not share your best interests. They are in the business to maximize profits by increasing viewership and readership. To do this, they broadcast content that sells rather than information that can help your odds of investment success. What sells is not the boring, redundant spiels about how long-term, disciplined investing using low-management fee funds is your best bet. Instead, what leads to more viewer interest is short-term speculation, like security picking and market timing.
Perhaps the similarities of speculation to gambling help draw so many individual investors to these shows. Of course, there is nothing wrong with the financial news media making profits. Before you act on what you see and hear, simply realize they have a conflict of interest. Your best bet is to consider these shows as entertainment.
Market “gurus” versus the flip of a coin
The financial news media regularly provides a platform for financial industry insiders. Talking heads on TV with fancy titles must have magical powers to forecast, right?
What these financial news media channels don’t disclaim is the dismal forecasting record of the so-called market “gurus.” On average, they make forecasts that turn out to be wrong more than half the time. That’s worse than a flip of a coin. A monkey throwing darts at a stock board will provide you with just as much useful guidance. What sometimes qualifies as an expert is someone who simply made the right call once (perhaps even due to sheer luck). When no one holds you accountable, it’s a pretty good gig to be a pundit on these shows.
So why do we still follow the advice from these “experts” who have no more insight about where the market is headed than you do? Well, maybe because when you tune in, you are persuaded with sensationalized market information, enforcing your anxiety about the complexity of the markets and about being left out of the game. Do all those bells, flashing visuals, and frequent outbursts on Jim Cramer’s show have anything to do with the markets? No, they don’t; however, they do have everything to do with ratings.
It seems that every day is full of opportunities for making profits and avoiding losses. If you are confused or intimidated, then the financial news media will persuade you of your need for their knowledge; otherwise, why would you watch? The more complex the markets seem, the more likely you’ll tune in for guidance.
Perhaps we actually want the “experts” to be right because then, maybe, we too can benefit from their understanding.
What about newsletters?
Let’s ignore data and evidence for a bit and assume the very best-case scenario: the investment newsletter to which you subscribed can actually forecast the markets. How might that play out?
If you actually had the foresight that a newsletter will end up with predictive powers, you may initially do well. Note though, it’s not just about how well the newsletter turns out to forecast; it’s also about your ability to pick it out among the hundreds of others ahead of time.
Regardless, let’s say both of those independent events happened – you picked out the right newsletter ahead of time and it turned out to have predictive powers. Shortly thereafter, other market participants would notice. The word would get out. Markets are very efficient. Soon, enough participants would read the same newsletter, pricing those forecasts into security values immediately after every release.
What would this mean for you? Well, your initial edge from the asymmetry in information would be priced out. You would no longer have an advantage reading that financial news service because everyone else would be reading it as well. So, if you insist on seeking out a newsletter to help you trade, you may actually be better off gambling with one that’s new, rather than paying for one that’s already been established. Because no money-making secret stays exclusive for long.
Of course, the likelihood that an investment newsletter or service has predictive powers is slim. In reality, no one has a crystal ball. To predict how the market will behave, you really need to know tomorrow’s news – that includes you, your broker/advisor, financial professionals, the market “gurus,” and newsletters. Paying for any service that touts forecasting skill is throwing money away. You are better off taking your money to a casino and putting it all on black. If the thought of that makes you nervous, then so should forecasting as an investment strategy.
Don’t act on market headlines and forecasts. It will be detrimental to your long-term investment success. It’s simply entertainment.
Dejan Ilijevski, MS, MBA, is president of Sabela Capital Markets a fee-only, Indiana-based registered investment advisor (RIA).
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