And now we turn to the biases and hazards of the financial media, the filter through which Wall Street is usually viewed. On this topic, I should begin by saying that I am burdened with even more than the usual conflicts. Having once been a popular “It boy” in the financial press—and now being a part-time member of it—I might be tempted to give this constituency a free pass on its (usually unacknowledged) role in encouraging millions of rookies to drink themselves silly at the market party a few years ago. On the other hand, having also been strafed by more than a few reporters and editors, I also have to be wary of sour grapes.
Let’s start with the positive: The press plays a vital role on Wall Street. It polices and exposes sleazy financial practices, informs and educates investors, and generally offers a mind-boggling amount of information and commentary at a reasonable price. Without the media, Wall Street would surely be even more dangerous to the uninitiated than it already is, and many practices deserving of reform would never be noticed. (Regulators and prosecutors read the papers, too, and often base their investigations on what they read.) Without the press, debates about the direction of markets, economies, commodity prices, interest rates, and house prices, et al., would be imprisoned within professional circles, and we would have to phone the stock exchange to figure out where the market was doing.
Of course, there’s no free lunch, and as we feast on gripping stories of price moves, dueling predictions, and conflicts-of-interest, we should keep in mind that financial journalists face conflicts of their own. First and foremost? To stay in business, they must persuade us to read, watch, or listen. Why is this a conflict? Because responsible investing is about as entertaining as watching bread rise.
As described in previous pieces, the way to give yourself the best chance of success in the markets is to diversify, buy low-cost funds, and hold them forever. That’s it. Markets will crash; markets will soar. Amazons and eBays will blast off; Enrons and WorldComs will crater. Some people will get rich; others will get frog-marched to jail. The stories will be captivating, outrageous, nauseating—you won’t be able to turn them off or put them down. As far as your investment decisions are concerned, however, they should be little more than noise.
The sad truth is that sound investment policy is boring. Diversify, reduce costs, aim to earn the market rate of return—even Stephen King would have trouble telling stories about that. But for the financial media to survive—at least the financial media devoted to helping you “profit” from reading/watching/listening—they have to suggest, over and over again, that there are exciting new places to put your money or dangerous places to remove it from. They have to tantalize you with the latest, greatest mutual funds or the “Ten Hot Stocks for 2005.” They have to make you drool by observing, again and again, that every dollar invested in Microsoft’s IPO in 1986 would be worth about $300 today. (Next time, it will be you!) They have to enumerate new ways to refinance your house, consolidate your debt, track your investments, pick better stocks, beat the pros, buy treasuries, retire rich, or make millions. They have to keep you watching, listening, and reading, or else they—not you, they—will go bankrupt.
Unfortunately, the underlying message of such commentary—Do something!—is often hazardous. Once you have gotten the investing basics right, you should do almost nothing. Every time you make a change, you incur costs—transaction costs, tax costs, psychological costs, and opportunity costs. You also, in many cases, decrease your odds of success. The least predictable investment decisions are those focused on the short term (months and years). The most predictable, meanwhile, are those focused on the long term (decades). To the media, of course, the long term is death. How often will you pay or tune in to be told that you shouldn’t do anything, that nothing has changed? Answer? Never. So the media must find other ways to keep you entertained.
They must tell you what the markets have done and what they might do (this is entertaining, but irrelevant). They must tell you which stocks are hot and which stocks are not (entertaining, irrelevant). They must stage bull-bear debates (entertaining, irrelevant). They must worship those who have been right lately and trash those who have been wrong (entertaining but misleading: Those who have been right lately are actually more likely to be wrong in the future). They must trot out an endless parade of tools and statistics that you might use to whup the market (entertaining, usually irrelevant). They must pounce on the latest scandal, swindle, or fraud as shocking evidence that the world is going to hell in a handbasket and that, if you don’t pay attention, you will go with it (fraud, sadly, has been with us since the dawn of time, as have bankruptcies and market crashes). They must blame your losses on everyone but you (we yearn to hear that it was someone else’s fault). They must promise to divulge the secrets of “insiders” (in truth, there really aren’t any “insiders,” at least not any who know what the market is going to do). They must pander, forever, to the part of you that wants to believe that, by watching this show or reading this research or listening to this analyst or avoiding this mistake or following this strategy, etc., you, too, can strike it rich (unlikely).
A few years ago, when it was fashionable to associate one’s business with all the money being made in the stock market, the slogan of the most famous financial TV network, CNBC, was “Profit From It.” If your definition of “profiting from it” was loose enough to include “being entertained,” the network could, indeed, have made you rich. If your definition was making more money, however, you would have been better off picking up the remote, turning off the TV, and getting back to work. A similar strategy, unfortunately, makes sense with much financial commentary.