In news media, a common trope is "if it bleeds, it leads". As such, the recent "blood letting" (in keeping with the theme...) on global markets makes for plenty of high profile coverage in the media. What is the average punter meant to make of it all? In line with other recent cautionary tales such as that by Mark Bouris in Fairfax media, Ben Smythe of Smythe Financial Management has offered up this piece on the matter...
Media is not a good source of investment advice
I recently attended an excellent session delivered by Jim Parker from Dimensional Fund Advisers about the “noise of the media”. Jim has some credibility in this area having previously worked as a financial journalist for many years.
One of the key takeaways from this session is the critical role the media now plays in sharing information when it comes to finance, and how this can be detrimental for long-term investors. If you think back, say 20 years, most of us were told what the news was, and, we were restricted in how we got news and when we received it. Financial Advisers had enormous power in determining what information their clients received, and also the “spin” they wanted to put on it.
Now the power of information firmly rests with the consumer, and they decide how and when they receive their information, and from what sources. This is where the role of the media is quite interesting. The media (or internet, in the main) has taken on a key role in advising consumers when it comes to finances. If you follow the way the media reports on finances, it is all about the here and now – sharemarket prices, auction clearance rates, consumer confidence surveys, Australian dollar movements, RBA interest rate announcements, etc.
Given the competitiveness of the media, the speed of information is critical. Every month when the RBA meets, I receive 2 text messages and 5 emails at 2.31pm telling me that the RBA has… decided to keep interest rates on hold. This speed driver in delivering news is great for those who are information junkies but not great for long-term investors. All it does is focus you on the short-term implications: In my opinion, trying to achieve out-performance in the short-term is a mug’s game.
The impetus to act quickly, and find the next best thing, is fuelled by the constant 24/7 news cycle, which is not a great way to build long-term wealth. I often ask myself when I read an investment piece from a respected expert, “what is the investment time horizon underpinning this recommendation?”. Unfortunately, most investment journalists, including expert contributors, are focused on short-term performances. Their headlines are obviously driven to “sell papers” but, in a lot of cases, are really only helpful for those keen to speculate on short-term trends or issues. These days, the financial media in general values stock picking and market timing; this befits their role really to entertain but does not necessarily inform.
A good example of this was the recent pullback in the Australian sharemarket after the Chinese government devalued their currency. This was deemed so important that it occupied the first 3 headlines of the ABC’s news that night. While the headline “Billions wiped off Australian shares” was certainly newsworthy, the headline a couple of days later “Record share gains restores confidence” would have left many humble investors confused and, in some cases, paralysed with fear.
As a consumer trying to take it all in, and disseminate what they should and should not act on, I would suggest this task is almost impossible with the amount of information floating around these days. The other interesting tidbit that Jim Parker noted was that, by the time something is reported in the media, this information has already been factored in to the sharemarket, property prices, Australian dollar, etc and trying to act on this information at that point may actually be the worst thing to do.
So what to do? I would suggest trying to follow a select number of commentators who seem more intent on informing readers, rather than entertaining them. Independent sources of financial media such as Bloomberg and Reuters are also a good place to start. It is important to be cynical, and remember that the journalist is more than likely writing with a short-term investment horizon in mind.
by Ben Smythe - with additional comments by Adviser Ratings