“When a reckless leader of Britain’s centrist elite called the 2016 referendum, he bequeathed it a problem it could not solve. But the dilemma will not remain unresolved for very long. An electoral upheaval is sweeping away the political class that created the impasse. Britain faces a clash between populisms of the right and left, while the forces of the centre sleepwalk into the flames.”
The following extract is taken from ‘Investing Through The Looking Glass: a rational guide to irrational financial markets’.
The delusion
The financial media exist to help investors make sense of the capital markets.
The reality
The financial media exist to monetise airtime and column inches – attention-grabbing real estate in which the search for truth is invariably compromised by an obsession with false narratives and commercial conflicts of interest. Whatever you may think of them, fund managers, financial advisers and investment bankers all work within a highly-regulated industry and are obligated to obtain qualifications that speak to a minimum threshold of professional attainment. No such obligations are required of financial journalists.
This is not to say that the financial media deliver no value to their users, only that it helps to appreciate their limitations. It is simply not reasonable to expect the casual consumption of financial media to correlate with investment success.
Having an edge
ONE OF THE IRON LAWS OF FINANCIAL TRADING is that there is always someone out there smarter than you are. The billionaire Mike Platt, co-founder of the hedge fund BlueCrest, alludes to this law when he talks about the type of trader that would be a good fit for his business:
I look for the type of guy in London who gets up at seven o’clock on Sunday morning when his kids are still in bed, and logs on to a poker site so that he can pick off the US drunks coming home on Saturday night. I hired a guy like that.
In short, it helps to have an edge. And by definition, the mass financial media cannot give you that edge. You may think you’re pretty smart by subscribing to the financial cable channel CNBC. Think again. In Dumb Money: Adventures of a Day Trader, Joey Anuff and Gary Wolf write about taking advantage of the daytime programming schedule of CNBC:
Another good CNBC play was to check the CNBC website and write down the schedule of CEO appearances. You lined up their companies in your trading windows, and as each executive came on you went short [sold their stock to buy it back later, ideally at a cheaper price]. The CEO appearance was, dollar for dollar, the most reliable non-news event the stock market had to offer, because hope sprang eternal among the inside-angle-searching E*Traders, who usually managed to convince themselves that Mr. CEO, the head of some company they’d been foolhardily accumulating for months, was finally ready to announce a gigantic buyout, or earth-shattering earnings, or a mega-investment-cum-beatification courtesy of Pope Gates.
Reliably, this did not happen. Important news was never released by surprise in CNBC interviews with CEOs, at least never when I was watching. Instead, the boss repeated old news, joked lamely with the interviewer, and answered ‘hard’ questions with the exact same sentence the company had been using for weeks. The E*Tards, who had grabbed just a bit more stock in anticipation of the televised chat, quickly reconsidered their strategy. In other words, they bailed. A little bailing led to a little more bailing, and in the few minutes before the market recovered there were usually a few pieces of bacon available for snarfing by the cynics in the crowd.
Good advice is beyond price
Financial journalism tends to fall into one of three camps. There are the recent historians, providing a narrative accounting for previous market movements. That narrative may be false, but we are hardwired to search for it regardless. Humanity abhors uncertainty. There are the good advisors, like Jason Zweig of the Wall Street Journal, offering honest and well-meaning advice to the self-directed investor. And there are the economic policy wonks, like Martin Wolf of the Financial Times and Paul Krugman of the New York Times. Economic policy wonks inhabit a world of almost pure academe and have the ear of politicians, and for that reason alone should be considered dangerous.
Jason Zweig is something of an outlier within the profession. He was once asked at a journalism conference how he defined his job. His response: “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” As Zweig puts it, good advice rarely changes, whereas markets change constantly. “The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”
Zweig sees his role as betting on regression to the mean while most investors, and financial journalists, are betting against it. Zweig tries to discourage his readers from chasing the latest hot trend and to think instead about investing in what is unpopular. “Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.” But advising people to do nothing is not the best way of selling column inches or airtime. Human beings are suckers for narrative. We love to be entertained with great stories.
If we are suckers for narrative, we are just as easily seduced by determined optimism, a topic well handled by Barbara Ehrenreich in her study Bright-Sided: How the Relentless Promotion of Positive Thinking has Undermined America. When relentless optimism mates with financial markets, the result is almost always a disaster.
The perversity of financial media is that both optimism and pessimism sells. Optimism sells financial newsletters, self-help books, credit cards and mutual funds. Pessimism sells financial newsletters, books, insurance and gold.
The institutional investor Tony Deden has written well of the emotional spiral that can come from being tossed and turned on the waves of the financial news cycle:
Daily, my mail box is full of emails, many of which come from well-meaning friends. ‘Have you seen this article?’ or ‘Do you know this guru?’ I follow the links as I frantically go from thenewyorktimes.com to financialarmageddon.com and everywhere in between. ‘The dollar will rebound’, ‘Gold is another bubble’, ‘Buy bonds’, ‘Sell bonds’, ‘Pork bellies are undervalued’, and so on. I pretend to read some of these writings just so that I can make up something to say should they follow up the email with a telephone call. In an enduring quest for understanding and picking kernels of knowledge, I find myself surrounded in an epochal – and mad – battle of the optimists versus the pessimists.
Honestly, there are intractable and momentous problems which should be the cause of considerable pessimism. But when it comes to action with other people’s money – particularly the irreplaceable kind – merely on account of the free advice of a well-known guru who writes for the-world-is-coming-to-an-end.com is complete madness. To follow the advice of an analyst working for a bank that can’t even manage its own balance sheet and who is intentionally or accidentally divorced from reality, is madness squared.
If you consume mainstream financial media in the hope of attaining enlightenment, you are dining in vain. Thomas Schuster of the Institute for Communication and Media Studies at Leipzig University has offered an excellent overview of the role of the media in shaping price discovery and fostering irrationality. One of the more dismal and now thoroughly discredited beliefs associated with the Efficient Market Hypothesis states that at any given time, securities prices reflect all available information.
By way of example, Schuster cites the stock of a company called Entremed: “Within a year, if all goes well, the first cancer patient will be injected with two new drugs that can eradicate any type of cancer, with no obvious side effects and no drug resistance – in mice.” New drugs are said to lead to the complete eradication of tumours. The New York Times reports the story on the front page of its Sunday issue. The company holding the licence for the active substances is named: Entremed. Its stock price immediately surges by 600%. As Schuster points out:
The news is spectacular and exciting. But it is not new. The New York Times itself had reported about the new therapy of tumours in animals in an article half a year earlier. Financial economists are amazed by the stock price reaction to the non-event as well. According to the efficient market hypothesis, which says that all available information is always completely reflected in prices, the republication of the story should not have provoked any significant price reactions. But what happens in this case is exactly the opposite. The Entremed stock reacts twice: to the publication of the original news. And, much more violently, to the prominently placed re-run of the research report on the Times cover. (Other biotechnology stocks rally sharply too.) The stocks of a whole branch of industry rise, as it seems, because some newspaper journalists have repackaged already known research results a second time.
These days, nailing the efficient markets theory is admittedly like shooting dead, bloated fish in a tiny barrel. But it is, of course, absurd to believe that all market participants are equally well informed. One might just as well say that all market participants are equally intelligent. The reality has to be that some investors are more equal than others, and some are certainly better at rapidly interpreting supposedly new, or genuinely new, information. Some investors also have to be better at knowing or surmising when not to act upon new information that might simply be noise. It would have been wholly legitimate trading behaviour to participate in the rally in Entremed stock even if one knew full well that the second article represented old news: if somebody is offering the potential to scoop up free dollar bills effectively provided by less informed (or other trend-following) investors, it seems churlish not to participate in the largesse. Exploiting the momentum of irrationally overpriced stocks is not a crime.
Schuster’s criticism of mainstream financial reportage doesn’t pull many punches:
The media select, they interpret, they emotionalize and they create facts. The media not only reduce reality by lowering information density. They focus reality by accumulating information where ‘actually’ none exists. A typical stock market report looks like this: Stock X increased because… Index Y crashed due to… Prices Z continue to rise after… Most of these explanations are post-hoc rationalizations. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and of course that the news disseminated by the media decisively contribute to the emergence of price movements.
In volatile markets, where both information flow and the inventory of investor intelligence amassed between market participants are wildly asymmetrical, investors should avoid giving undue attention to the media’s wholly subjective (and possibly conflicted) interpretation.
Update as at July 2019:
In the aftermath of the Brexit referendum and the election of President Trump, it seems abundantly clear that the mainstream media have become weaponised in defence of a beleaguered Establishment. What we have termed ‘the magic Brexit wrecking ball’ will go on delivering its inexorable magic if it manages to take out the likes of the BBC and the New York Times before its work is done. Meanwhile, seekers out of something closer to objective truth will find themselves inevitably drawn to the better independent voices within “alternative” media such as Twitter and YouTube. Sceptics: come on in, the water’s fine.
“When a reckless leader of Britain’s centrist elite called the 2016 referendum, he bequeathed it a problem it could not solve. But the dilemma will not remain unresolved for very long. An electoral upheaval is sweeping away the political class that created the impasse. Britain faces a clash between populisms of the right and left, while the forces of the centre sleepwalk into the flames.”
The following extract is taken from ‘Investing Through The Looking Glass: a rational guide to irrational financial markets’.
The delusion
The financial media exist to help investors make sense of the capital markets.
The reality
The financial media exist to monetise airtime and column inches – attention-grabbing real estate in which the search for truth is invariably compromised by an obsession with false narratives and commercial conflicts of interest. Whatever you may think of them, fund managers, financial advisers and investment bankers all work within a highly-regulated industry and are obligated to obtain qualifications that speak to a minimum threshold of professional attainment. No such obligations are required of financial journalists.
This is not to say that the financial media deliver no value to their users, only that it helps to appreciate their limitations. It is simply not reasonable to expect the casual consumption of financial media to correlate with investment success.
Having an edge
ONE OF THE IRON LAWS OF FINANCIAL TRADING is that there is always someone out there smarter than you are. The billionaire Mike Platt, co-founder of the hedge fund BlueCrest, alludes to this law when he talks about the type of trader that would be a good fit for his business:
I look for the type of guy in London who gets up at seven o’clock on Sunday morning when his kids are still in bed, and logs on to a poker site so that he can pick off the US drunks coming home on Saturday night. I hired a guy like that.
In short, it helps to have an edge. And by definition, the mass financial media cannot give you that edge. You may think you’re pretty smart by subscribing to the financial cable channel CNBC. Think again. In Dumb Money: Adventures of a Day Trader, Joey Anuff and Gary Wolf write about taking advantage of the daytime programming schedule of CNBC:
Another good CNBC play was to check the CNBC website and write down the schedule of CEO appearances. You lined up their companies in your trading windows, and as each executive came on you went short [sold their stock to buy it back later, ideally at a cheaper price]. The CEO appearance was, dollar for dollar, the most reliable non-news event the stock market had to offer, because hope sprang eternal among the inside-angle-searching E*Traders, who usually managed to convince themselves that Mr. CEO, the head of some company they’d been foolhardily accumulating for months, was finally ready to announce a gigantic buyout, or earth-shattering earnings, or a mega-investment-cum-beatification courtesy of Pope Gates.
Reliably, this did not happen. Important news was never released by surprise in CNBC interviews with CEOs, at least never when I was watching. Instead, the boss repeated old news, joked lamely with the interviewer, and answered ‘hard’ questions with the exact same sentence the company had been using for weeks. The E*Tards, who had grabbed just a bit more stock in anticipation of the televised chat, quickly reconsidered their strategy. In other words, they bailed. A little bailing led to a little more bailing, and in the few minutes before the market recovered there were usually a few pieces of bacon available for snarfing by the cynics in the crowd.
Good advice is beyond price
Financial journalism tends to fall into one of three camps. There are the recent historians, providing a narrative accounting for previous market movements. That narrative may be false, but we are hardwired to search for it regardless. Humanity abhors uncertainty. There are the good advisors, like Jason Zweig of the Wall Street Journal, offering honest and well-meaning advice to the self-directed investor. And there are the economic policy wonks, like Martin Wolf of the Financial Times and Paul Krugman of the New York Times. Economic policy wonks inhabit a world of almost pure academe and have the ear of politicians, and for that reason alone should be considered dangerous.
Jason Zweig is something of an outlier within the profession. He was once asked at a journalism conference how he defined his job. His response: “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” As Zweig puts it, good advice rarely changes, whereas markets change constantly. “The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”
Zweig sees his role as betting on regression to the mean while most investors, and financial journalists, are betting against it. Zweig tries to discourage his readers from chasing the latest hot trend and to think instead about investing in what is unpopular. “Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.” But advising people to do nothing is not the best way of selling column inches or airtime. Human beings are suckers for narrative. We love to be entertained with great stories.
If we are suckers for narrative, we are just as easily seduced by determined optimism, a topic well handled by Barbara Ehrenreich in her study Bright-Sided: How the Relentless Promotion of Positive Thinking has Undermined America. When relentless optimism mates with financial markets, the result is almost always a disaster.
The perversity of financial media is that both optimism and pessimism sells. Optimism sells financial newsletters, self-help books, credit cards and mutual funds. Pessimism sells financial newsletters, books, insurance and gold.
The institutional investor Tony Deden has written well of the emotional spiral that can come from being tossed and turned on the waves of the financial news cycle:
Daily, my mail box is full of emails, many of which come from well-meaning friends. ‘Have you seen this article?’ or ‘Do you know this guru?’ I follow the links as I frantically go from thenewyorktimes.com to financialarmageddon.com and everywhere in between. ‘The dollar will rebound’, ‘Gold is another bubble’, ‘Buy bonds’, ‘Sell bonds’, ‘Pork bellies are undervalued’, and so on. I pretend to read some of these writings just so that I can make up something to say should they follow up the email with a telephone call. In an enduring quest for understanding and picking kernels of knowledge, I find myself surrounded in an epochal – and mad – battle of the optimists versus the pessimists.
Honestly, there are intractable and momentous problems which should be the cause of considerable pessimism. But when it comes to action with other people’s money – particularly the irreplaceable kind – merely on account of the free advice of a well-known guru who writes for the-world-is-coming-to-an-end.com is complete madness. To follow the advice of an analyst working for a bank that can’t even manage its own balance sheet and who is intentionally or accidentally divorced from reality, is madness squared.
If you consume mainstream financial media in the hope of attaining enlightenment, you are dining in vain. Thomas Schuster of the Institute for Communication and Media Studies at Leipzig University has offered an excellent overview of the role of the media in shaping price discovery and fostering irrationality. One of the more dismal and now thoroughly discredited beliefs associated with the Efficient Market Hypothesis states that at any given time, securities prices reflect all available information.
By way of example, Schuster cites the stock of a company called Entremed: “Within a year, if all goes well, the first cancer patient will be injected with two new drugs that can eradicate any type of cancer, with no obvious side effects and no drug resistance – in mice.” New drugs are said to lead to the complete eradication of tumours. The New York Times reports the story on the front page of its Sunday issue. The company holding the licence for the active substances is named: Entremed. Its stock price immediately surges by 600%. As Schuster points out:
The news is spectacular and exciting. But it is not new. The New York Times itself had reported about the new therapy of tumours in animals in an article half a year earlier. Financial economists are amazed by the stock price reaction to the non-event as well. According to the efficient market hypothesis, which says that all available information is always completely reflected in prices, the republication of the story should not have provoked any significant price reactions. But what happens in this case is exactly the opposite. The Entremed stock reacts twice: to the publication of the original news. And, much more violently, to the prominently placed re-run of the research report on the Times cover. (Other biotechnology stocks rally sharply too.) The stocks of a whole branch of industry rise, as it seems, because some newspaper journalists have repackaged already known research results a second time.
These days, nailing the efficient markets theory is admittedly like shooting dead, bloated fish in a tiny barrel. But it is, of course, absurd to believe that all market participants are equally well informed. One might just as well say that all market participants are equally intelligent. The reality has to be that some investors are more equal than others, and some are certainly better at rapidly interpreting supposedly new, or genuinely new, information. Some investors also have to be better at knowing or surmising when not to act upon new information that might simply be noise. It would have been wholly legitimate trading behaviour to participate in the rally in Entremed stock even if one knew full well that the second article represented old news: if somebody is offering the potential to scoop up free dollar bills effectively provided by less informed (or other trend-following) investors, it seems churlish not to participate in the largesse. Exploiting the momentum of irrationally overpriced stocks is not a crime.
Schuster’s criticism of mainstream financial reportage doesn’t pull many punches:
The media select, they interpret, they emotionalize and they create facts. The media not only reduce reality by lowering information density. They focus reality by accumulating information where ‘actually’ none exists. A typical stock market report looks like this: Stock X increased because… Index Y crashed due to… Prices Z continue to rise after… Most of these explanations are post-hoc rationalizations. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and of course that the news disseminated by the media decisively contribute to the emergence of price movements.
In volatile markets, where both information flow and the inventory of investor intelligence amassed between market participants are wildly asymmetrical, investors should avoid giving undue attention to the media’s wholly subjective (and possibly conflicted) interpretation.
Update as at July 2019:
In the aftermath of the Brexit referendum and the election of President Trump, it seems abundantly clear that the mainstream media have become weaponised in defence of a beleaguered Establishment. What we have termed ‘the magic Brexit wrecking ball’ will go on delivering its inexorable magic if it manages to take out the likes of the BBC and the New York Times before its work is done. Meanwhile, seekers out of something closer to objective truth will find themselves inevitably drawn to the better independent voices within “alternative” media such as Twitter and YouTube. Sceptics: come on in, the water’s fine.
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