Although behavioral biases can lead investors to make irrational decisions, there are powerful external levers that influence our approach to investing as well.
Financial news channels use sensationalism to broadcast market information. The rolling stock market ticker tape, the flashing visuals about stock price movements, the conveyor belt of talking heads, and the broadcasts from the floors of the stock exchanges and the Chicago Board of Trade enforce viewers’ anxiety about being left out of the game. It seems that every day is full of opportunities for making profits.
The consequence of reporting each headline as if it was a breaking news event nudges investors into trading more, into seeking supra-normal returns. The more likely investors are to try and beat the markets, the more likely they are to participate in frequent trading, in seeking out fund managers who can beat the market, and in stock-picking and market-timing. These behaviors lead to higher commissions and advisory costs, which trickles up wealth from your pockets to those of the financial advisors, brokerage firms, and mutual fund companies. Not surprisingly, most news media advertising dollars come from firms that make money when you trade and speculate.
The reality is that the financial news media does not share your best interest. They are in the business to make profits by maximizing viewership and readership, which lead to more advertising dollars. Indeed even the “market-gurus” and so-called “experts” on these broadcasts make predictions that on average turn out to be worse than a flip of a coin (market guru prediction grades; investment bank prediction grades). Why would you follow their advice? If the financial news media really shared your in your best interest, their breaking news would align with principles that have been proven to improve your investment experience: “invest for the longer term”; “minimize costs”, “diversify globally”; “be patient and disciplined”; and “focus only on what you can control”.
The Financial Media is in the Business of Entertainment
There is nothing wrong with the financial news media trying to make a profit. Viewers and readers should simply realize that, instead of investment insights and financial science, the financial media are in the business of entertainment. If the financial media actually conveyed useful information to investors, you’d see headlines (at the very least disclaimers) like these:
- Our advertisers pay us to provide “news” that enriches their bottom line at the expense of yours.
- Our “experts” are less accurate in their predictions than the flip of a coin.
- It would be more accurate to call “predictions” by our experts “random guesses.”
- We don’t have a clue where the market is headed and neither does anyone else.
- When you trade, it’s likely an institution is on the other side. We don’t like your chances.
- It makes no sense to buy individual stocks.
- Even if it did, we have no way to identify stocks likely to outperform in the future.
- Overweighing your portfolio with gold is irrational, no matter how frightened you are.
- If bouncing in and out of the market made sense, professional managers would not have such a terrible track record.
- You’d be better off not watching or reading us.
Don’t Make Market Headlines Actionable
Even the professional traders don’t get their actionable information from financial market news channels. By the time these channels broadcast news that might actually have market impact, traders have already received that information using other, far more sophisticated and immediate news aggregation services, and hypercompeting forces are already pricing that news into the market. If the professionals don’t rely on the financial news media, why should you? By the time you hear or read anything on TV or online, it’s already way too late to be able to profit off of that information.
There is a much better way to invest. When investors harness the power of markets to build wealth in the long term, then daily, weekly, monthly, and even yearly market swings will be inconsequential. That’s when investors become rational and relaxed about investing. They consider the financial climate, the long term growth of their investment, rather than the daily fluctuations of the financial weather (continue reading…Climate vs. Weather, Tuning Out The Noise).
Don’t make market headlines actionable. It often leads to the wrong investing decisions.
Consider the timelines below and whether you would have made the right market call after each headline. Would you have held on to your position a few days after a headline? A week? A month?