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Don’t Trust Financial Media

Investment Technique

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Curriculum Content

The financial media is useful for many things but none of them are recommendations concerning a specific investment. This is due to two main factors: the amount of time information takes to move from point of origin to you and the short-term focus of investment media. A potential lack of updates is an additional concern.

Delay in Financial Media Publication

The number of time information moves from its source to you may seem small in an absolute amount of time, but it is actually vast. The reason is the way information flows in the investment markets. By the time an individual investor receives media advice on a specific investment, it has already been received by institutional investors including investment banks, hedge funds, mutual funds, and high powered institutions engaged in trading. It may also have been received by highly connected individual investors. All of these institutions have already considered and acted on the information received and purchased or sold their equity. This means that price movements may have already occurred, and unless you are actively trading, you are late to the game. The format of the media reception is fairly irrelevant. Internet, radio and television are slight delays only if you are among the immediate viewers. Newspaper, magazine or any publication are far too late, even if reading the morning after print. By the time information from those sources have arrived, the price changes have already occurred. These media sources typically give very little indicator of the financial value of the underlying investment, only price fluctuations.

Short Term Focus

The financial media is extremely short term. Very rarely do mainstream financial media focus on recommendations beyond a year. This is chiefly due to its service of Wall Street, which overwhelmingly focuses on quarterly gains and not long term holdings, and strongly profits from a trading environment as compared to a buy and hold environment. The commissions and fees earned are based on frequent trading. Undisciplined investors are frightened or encouraged by the media to make greedy or irrational trades and inadvertently overspend on fees and commissions.

Uses for Financial Media

The media is useful for a few purposes. The first is acquiring the total overall economic picture. Usually, this is in the short term but may contain long-term estimates as well. The second is acquiring information about potential industries for finding growing firms, which should always be examined for fundamentals and strategy. The third is news releases and information about firms that may impact long-term financial fundamentals or may indicate a change in a firm’s strategy.

Low Impact News

Unfortunately, many updates have no actual reflection on a firm’s financial fundamentals or ability to function. If a company can easily bypass negative news released by the media with its fundamentals intact or without having to engage in serious strategic change, there is very little reason to react as a long term investor. The rather obvious exception to this rule is in scenarios where news will result in a significant capital loss.

Always Preform Analysis

Information from the media should never be taken as gospel without analysis. When a recommendation is made by the media, you should always analyze and investigate the firm before purchasing, always! You should never skip analysis while relying on the media. You also may not receive follow-up updates to the situation, resulting in a failure to react quickly. This could result in you failing to receive crucial loss avoiding updates. Proper analysis before investing will result in recommendations being properly identified as weak investments or the risks of an investment being known to the investor. This allows you to skip investments or to watch certain problem areas for potential blow-ups.

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