When I was a kid, my older sister Kim would often prey on my youth and ignorance. While this harassment took many forms, the instance I remember most was being “persuaded” by my sister and her friends to let them dress me up as a girl with makeup. It’s surprising how easily she convinced me to go along with her schemes like I was a puppet, and she was the puppeteer pulling the strings as she desired. As a young kid, I didn’t stand a chance.
Eventually, as I got older (and a bit wiser), I caught onto the game my sister was playing. Realizing that she was manipulating my emotions and reactions gave me a fighting chance, allowing me to cut some of those strings from time to time.
Those manipulative moments with my sister growing up parallel the relationship investors have with the financial media. Too often the financial media plays the role of puppeteer, pulling strings that shape and direct the emotions of investors, usually to increase their own profits. Investors need to develop the same kind of awareness that I developed with my sister, understanding the motives behind financial media in order to reduce vulnerability.
If It Bleeds, It Leads
Many have heard the old adage when it comes to nightly local news, “if it bleeds, it leads.” Financial media has adapted this mantra a bit, focusing on greed or fear to lead the way when it comes to capturing investor attention. They understand if you’re dreaming of making a fortune or scared of losing it all, they’ve got your attention. Next time you’re watching your favorite financial TV channel, watch for the following puppeteer moves:
- Notice how often words like plunge, plummet, or surge are used both in conversation and plastered in all caps on the screen. These words push our internal greed and fear buttons, which causes us to watch longer.
- When discussing stock market performance during the day, note how often financial TV references the Dow versus the S&P 500. Why? The Dow is trading around 35,000 while the S&P is trading near 4,500. One percent of the Dow is 350 points while one percent of the S&P is only 45 points. Which number scratches your greed or fear itch more? The larger number, of course. It’s a subtle but intentional way of exploiting investors’ emotions.
Financial Media Motivators
On any given day, the market experts on your favorite financial news channel make dozens of market predictions. Do advertisers pay more money for commercials based on the daily number of accurate market predictions? Of course not. Ad rates are driven by viewership, commanding top dollar for more eyeballs rather than spot-on market predictions.
It would be nice if the financial media’s primary goal was to support or enhance an understanding of your investment goals, but that’s not the case. Financial media’s primary goals are strong ratings. Put plainly: big viewership leads to higher company revenues and profits.
To be fair, financial media will always have a hard time focusing on your investment goals. The advice they give is unaware of your investment profile: short-term or long-term horizons; low, medium, or high-risk tolerance. It’s tough for them to narrow their commentary based on your personal goals, whether it’s funding college tuition, buying a second home, or retiring comfortably. You wouldn’t take exercise advice from a trainer who didn’t know your body type or fitness goals, why take investment advice from experts who know nothing about your financial goals?
Opinions Not Accuracy
Former Forbes Magazine CEO Steve Forbes once said, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.” Many investors tend to believe that financial experts are paid because of the accuracy of their market predictions. Mr. Forbes made it abundantly clear that even media leaders themselves know this isn’t the case.
“You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.” — Steve Forbes, FORBES Magazine
Financial experts are paid to have an opinion, NOT to be right. And like any good salesman, their opinion should be extremely convincing and somewhat entertaining, which they usually are! In baseball, before a batter steps into the batter’s box, you know the likelihood of that player getting a hit before they take a swing. Their batting average is available for all to see. When was the last time you saw a market expert’s stock pick average posted on the screen as they stepped up to make another market prediction? There’s a reason you don’t see it and it’s the same reason your college career counselor told you not to put your GPA on your resume if it wasn’t impressive.
Financial Education or Entertainment?
Given how financial media is compensated, it’s fair to ask if they’re in it to educate or entertain investors. One way we can answer this question is by looking at the people hired to produce some of these financial news shows. Susan Krakower is the former producer of Jim Cramer’s highly rated Mad Money show on CNBC. Her illustrious production career also includes stints at The Jerry Springer Show, The Maury Povich Show, and The Sally Jessy Raphael Show. You connect the dots.
It’s not that financial media is all bad. There are many highly respected sources for financial news. But it’s critically important that investors know that the primary goal is strong viewership and ratings, not addressing individual financial goals. Without this awareness, the greed and fear drivers can put investors at great risk of excessive trading, worrying about the markets, and making irrational investment decisions that can wreck financial plans.
By recognizing that often financial media’s goals are not aligned with our own financial goals (or risk tolerance, or time horizons), investors can prevent their emotions and focus from getting hijacked and instead stay focused on their long-term plan.
by JOHN FISCHER, CFA®, CFP®
John is the Chief Investment Officer (CIO) at Mosaic Family Wealth. He leads the firm’s Investment Committee which shapes the firm’s investment philosophy and strategy for client portfolios. He also serves on Mosaic’s Leadership Team. A 20-year industry veteran, John is most passionate about helping people understand how emotions relating to investments can be more important than the investments themselves in achieving financial goals.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing in this content is intended to be, and you should not consider anything in this content to be, investment, accounting, tax, or legal advice. If you would like investment, accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs.
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