Financial news seems to be everywhere these days. In our time of 24-hour television programming and with the rapid-fire pace of the internet, news outlets have come to revel in the expulsion of constant financial predictions, assessments, editorials, and endless debate. Most of this content, however, is pure nonsense. The rest of it is comprised of carefully timed and rehearsed messages from the biggest financial players in the industry meant to ensure that the average investor has absolutely no hope of making money in the market.
1. Analysts are often not investors themselves.
When watching financial news, we hear the market being discussed by countless talking heads from a wide range of backgrounds. These individuals who are often referred to as “consultants”, “pundits”, “correspondents”, and “experts” speak confidently about the outcomes of seemingly unpredictable future events. The question is, however, why are these individuals not making millions by following their own advice and investing with the expectation that their predictions are correct? If, on the other hand they are not as confident as they seem, then we must question the validity and usefulness of their commentary.
The reason is that this editorial material is often interpreted as investment advice by the public, which is encouraged to adopt a hypersensitivity to daily price movements and a reliance on myriad baseless assumptions. As we do not constantly check the price of our house, car, or jewelry every minute of every day and rush to buy or sell these assets as soon as their price changes by a mere few percentage points, why do we apply this sentiment to the financial instruments we hold?
As an investor in a stock, you are a partial owner of a company, nothing more and nothing less. When you begin to trade in and out of positions based on news reports and analyst predictions, you become a gambler. As more investors are adopting active trading strategies to seek higher returns, they may unknowingly be exposing themselves and their portfolios to greater volatility and risk of loss.
2. Financial information presented through major news sources is outdated.
Aside from the sheer volume of information being made available by the media, it is also important to consider that the market insights provided to consumers by financial news media are often woefully outdated. As an example, one morning earlier this year I watched the price of a well-known stock drop in value precipitously. At the time I was watching the market very closely and monitored two major news networks for any news pertaining to this security. Nothing was reported about the company until after the market closed in the evening, which meant that the professional traders and market makers had made their moves roughly eight hours before the general public was made aware of the situation. As a result, a novice investor hoping to trade on this information when the market reopens the next day faces a significant risk of making a losing trade.
3. Financial commentators may have conflicting interests.
Investors must consider the motives of financial analysts who work for the major investment firms and make predictions through mass media outlets. Their appearances are often presented as public service announcements in which the commentator purports to be “warning” or “helping people plan for the future”. Before believing this notion, one must keep in mind that many of these firms trade for their own proprietary accounts, meaning that they are investing their own money aside from the investments they make on behalf of their clients. In many cases, these institutions can generate higher profits by trading for themselves. As a result, a financial analyst from a large firm may be disseminating opinions that benefit the firm’s trading positions at the expense of those investors relying on this information.
Need a stock to go down? Predict that the company is going out of business as it has not been as innovative and successful in establishing themselves as a brand leader. Need the same stock to go up? Mention that you believe it is a great company that is sure to endure these difficult economic times and take a dominant role in the market. Sound familiar? It should, because these statements are made every day with absolutely no accountability as to the final outcome. This is a win-win situation because the news station is able to fill time while the investment firm and their analyst receive publicity. The only loser in this equation is the average investor who might trade on this information without the financial or economic understanding needed to make informed investment decisions.
Let’s illustrate this point with an example. Suppose that ABC Investment Company is looking to capitalize on the appreciation in the price of Commodity X. First, ABC proceeds to acquire large quantities of this commodity. Whenever possible, complex trading techniques are used to mask the total volume of transactions and the identity of the purchaser. This makes it more difficult for the other market participants to identify the strategy at play.
Once an adequate amount of Commodity X has been purchased, the focus shifts to a public relations campaign consisting of analyst commentary, revised ratings on Commodity X, and editorials touting the benefits of the commodity to the general public. This usually generates a substantial amount of interest in a security and influences new investors to purchase the commodity at ever rising prices.
When ABC reaches a predetermined profit level from the increased price of Commodity X, it is now time to sell the investment. If the volume of transactions is significant enough, this sale will cause the price of the commodity to drop significantly. This is usually done after the market is closed so that the average investor is unable prevent losses. Additionally, stop-losses fail to trigger sales as the market is no longer open. This, in turn, generates tremendous profits for ABC Investment Company while many other investors lose money. While this scenario is highly simplified, the fact remains that market makers can easily use news outlets to gain an advantage in the markets.
4. Advantages in the markets arise only when you have information that other market participants don’t have.
Modern investors need to understand that the biggest advantage one can gain in the markets is information. This information needs to be reliable and put into action before other market participants have an opportunity to act on it. As such, broadcasting actionable financial data to the public puts all market participants on an even playing field, thereby rendering the data practically worthless. Accordingly, it is important to consider the source of financial commentary and identify the parties which will most benefit from a particular transaction. In today’s markets, however, this has become increasingly difficult as the financial and media sectors have become so closely linked.
5. The media and financial service industries have become interconnected.
As financial institutions become more consolidated and powerful, news organizations are less likely to speak out against them as they risk losing access to well-known investment firms and analysts. This is disadvantageous to investors as they often must look elsewhere for unbiased and reliable financial and economic information. Searching for such information is becoming increasingly more difficult because the major firms have realized the power of social media and have begun to influence bloggers and commentators to represent them in their work. This influence may be disclosed in some cases, but concealed in others to maintain the appearance of sincerity.
It is also important to remember that news organizations themselves have shareholders whom they must answer to. These companies are often invested in by institutional investors and large funds operated by well-known global investment companies. As such, the financial information offered by major news sources may be biased and filtered to accommodate the needs of powerful and influential market participants.
In this time of unprecedented volatility and uncertainty in the markets, it is more important than ever to work with a financial professional whom you can trust.