What many take for financial news is actually processed and packaged for entertainment and advertising. Clash of the Financial Pundits by Joshua M Brown and Jeff Macke provide an inside look and discussion with many of the popular talking heads on financial shows. It is hard to separate news from noise – and most of it is noise.
Here are some excerpts to give you a taste for the theme of the book, at least from my humble perspective:
“What the old financial experts have in common with those from every other era … is that they are oftentimes doing their best with limited information and that their biases are almost always on full display.” “Warren Buffett once said that ‘forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.’ … ‘We have long felt that the only value of stock forecasters is to make fortune-tellers look good.”
One of the first bubbles, fed by 18 newspapers in London to capture the public’s imagination, was the South Sea Company in the early 1700’s. Brown and Macke explain briefly how the media was used to continue to create clamor to buy company shares. “Watching one of the great geniuses of human history succumb to the South Sea calamity reminds us that intellect and worldliness are not impregnable defenses against mass delusion in full blossom. Posterity records just a solitary quotation from Sir Isaac Newton pertaining to his losses in the affair, but it’s a great one: ‘I can calculate the motion of heavenly bodies but not the madness of people.'”
The authors interspersed their narrative and examples with interviews from various well known names. Here’s a quote from their interview with Ben Stein: “… I have learned over the years to just give extremely general advice. And the general advice is, ‘Buy the indexes and hold on to them forever,’ and that advice has turned out to be extremely good advice. But it’s the ‘forever’ part that’s a problem in human life.” “… people who tell you what the big boys are doing – and sort of implying that you should do what the big boys are doing – are not doing you a particularly useful service.” “There’s so much wisdom in the sentence ‘Just buy the market, and just hold on.’ It’s just mind boggling how much wisdom there is there. Or you can put yourself in the hands of the Wall Street wealth extraction machine, which just takes money out of your pocket by making you trade.” … “But there is some pretending that little bits of day-to-day information have great importance. And they don’t.” … “they’re trying to get rich quick.” … “they believe there’s some magic, and they will learn the magic by watching the magicians on TV. There is no magic. It is just diversification and patience. There’s no magic.”
Brown and Macke discuss “All Good Things…” where an “all-but-forgotten” analyst named James Alphier analyzed the great market timers in a 1981 research paper. “Alphier’s conclusion upon studying these giants as well as a great many pretenders was that with only a handful of exception, great timers could only remain accurate for a run of between three and five years.” I suggest that people need their money, especially retirement money, for longer than five years. And also, by the time one recognizes the streak, they’re well into their time period. Finally, who and how does one then move on to the next?! There’s wisdom in what Ben Stein suggests.
And now …. getting to why listening and watching pundits is dangerous to your wealth!
“In May 2013, a research paper – written by a pair of grad students from Washington State University economics program – proved what many of us already knew: he who comes off as the most sure in his opinions will attract the most attention.” “Our ears will prick up when we hear an opinion being espoused in a brash, persuasive manner. There is a physiological explanation for this in that anxiety is the emotional manifestation of uncertainty and it is an unpleasant state of being for humankind. We want to alleviate is as soon as possible, even if we must turn off some of our cognition in order to do this. Researchers have been explaining this phenomenon for decades, beginning with Berger and Calabrese’s work (from 1975) on the uncertainty reduction theory as it pertains to interpersonal relations.”
“… we want to be told exactly what’s going to happen and what to do about it, and we’re willing to suspend our disbelief that anyone truly knows what the future holds provided the man or woman delivering this guidance is doing so with confidence.” … In the context of our discussion here, let’s also add that it’s better to be confident than accurate. The public has shown a clear preference for the former over the latter time and time again.” … “Be alert to the fact that the amount of confidence with which a forecast is delivered does not add to its probability of coming true, even though your brain has evolved to see it that way.”
What has their book tried to teach?
“By thinking in these terms and not merely taking the information being presented by our parade of pundits at face value, we put ourselves in a position to deepen our own thought process as opposed to merely accepting the finished product of someone else. It is in this way that we can make the media work for us rather than thwart us in our quest to stay up to speed.”
In other words, you need to have a sound investment philosophy, based on empirical evidence and not just opinion, to separate the chaff from the wheat when you are listening to the media so you aren’t whipsawed all over by the many conflicting opinions you hear and read.
In conclusion, here’s a brief Aesop’s Fable to illustrate how pundits and the media create illusions: