Saturday, April 5, 2008

Beware of CNBC and the Talking Heads

Here is a piece from the Financial Times(in full) that I wanted to leave on here as a warning on who you should trust during bad markets. This is why I think blogs and other educational sources are important because their hand is not in the Wall St. cookie jar. I highlighted the CNBC section because they are the worst when it comes to hyping the markets IMO.

I have tried to warn all of you that the housing crisis is over/market bottom callers should be ignored because they have an agenda. The following from FT explains why:


Take financial talking-heads with a grain of salt
By Mark Sellers
Published: April 5 2008 04:48 Last updated: April 5 2008 04:48

Everyone acts in his or her self-interest. This is a key facet of humanity, and keeps our society moving forward.

Think about that the next time you make an investment decision. As an investor, it is in your interest for your portfolio to do as well as possible with the least risk possible. Unfortunately, this is not the goal of most of the people you may rely on for news and advice. There are conflicting incentives everywhere in the world of finance.

This is something to keep in mind when you read the newspaper, watch CNBC, or manage your personal finances. Various stock market players have different incentives, none of which is necessarily in your best interest:

Government officials. An elected official’s primary motivation is to be re-elected. Voters don’t tend to re-elect politicians who let the stock market go down. So, government officials have large incentives to prop up markets to the greatest extent possible. Every time you hear an elected (or appointed) official talk about the market, you should take it with a huge grain of salt. These people only want to see stock prices go one way – up – because it’s in their best interest. But it’s not in your best interest unless you’re a short-term investor who only cares about the next year, not the next decade.

It’s not in your best interest because, to juice the markets, politicians like to pump massive amounts of money into the capital markets and bail out bankers who have made dumb decisions. This works in the short term but leads to moral hazard, excessive risk-taking by investors, and inflation – all long-term problems. As an elected official, though, you aren’t worried about long-term problems. You want to get re-elected. You’re worried about the next 12 months, not the next 12 years.

Financial advisers. Many advisers are paid on commission from mutual fund companies into whose funds they place client assets. If you use an adviser who is paid in this manner, watch out. You will be put into funds that are probably not the best choices, simply because the adviser has to earn a living. Since advisers don’t explicitly get paid based on performance, they have no incentive to put you into above-average funds.
You should work with “fee-only” advisers who are paid by the hour.
Stockbrokers. Brokers like you to trade a lot. Some are more unscrupulous than others. Enough said.

CNBC guests. When you see a so-called “expert” voluntarily appear on CNBC, for no payment, ask yourself why this person is appearing on television. The reason is that the person is acting in his own interest. For a money manager, that means generating business for his investment firm. A manager will go on TV and attempt to sound as intelligent as possible so viewers will think he’s smart, and invest in his fund. A second, more insidious reason a money manager might appear on TV is so he can pump his own stocks, thereby getting a short-term bounce in the share price – at which time he may be selling shares to you, the viewer. A third reason is vanity; people like seeing themselves on TV.

Financial news media. If you work for a financial broadcaster such as CNBC, you want the market to go up. This is because, in bull markets, more people are interested in stocks, so ratings are higher. The financial news media have an inherent bias toward bullishness because their executives know this is good for business. A subtle push from the top can taint the coverage of an entire news organisation.

Investment newsletters. Good investment ideas don’t happen on a schedule, and may not last long. But that doesn’t matter to newsletters; they require a certain number of investment ideas to write about every week. You can see the incentive for them occasionally to publish stale, or inferior ideas, that fill space. So my advice would be not to take newsletter stock recommendations too seriously.

Wall Street analysts. Don’t believe anything you hear from a stock analyst. Most are honest and competent, and some aren’t, but you don’t know which are which. Gather your own data, make your own decisions. If you are incapable of doing that, either use a service free of conflicts of interest such as Morningstar.com or Value Line, or don’t invest directly in the stock market.
Hedge fund managers turned journalists. The reasons for a hedge fund manager to write for a newspaper such as the Financial Times are the same as those for a money manager who appears on CNBC, with the added possible reason that maybe the manager enjoys writing once in a while.
And that’s partially the case with me. But after writing for this publication for two years, I have decided that I no longer want to write in a public forum for non-clients because it’s not in my best interest to do so. I’m not trying to raise capital, I don’t feel comfortable appearing to be pumping up my own stocks, and I have no desire for fame or to see my name in print any more. So this will be my last article. Thanks to all of you who have read my columns and written to me.

Here is the link if you want to pass it around.

9 comments:

Anonymous said...

Hey,

Sorry to see you go. I read your blog every day.

Avl said...

That's Mark Sellers - and not Jeff - saying he no longe wants to write for Financial Times, right? Or did I misread the final paragraph?

Anonymous said...

eh'...its probably me.....i skim sometimes.....

Jeff said...

Avl and anon

I am not going anywhere. That was Mark Sellers.

I am a skimmer as well at times. This blog is alive and well.

CNBC is a joke and I hope they start to report the reality of our economy.

Keep on stopping by.

Avl said...

Jeff, if there were anchors/reporters at CNBC willing to speak honestly, I'm sure they were 'forced' out a while back for not being 'team players'.
When I watched local network news years ago back in Chicago, I felt they were eager to report all the performance downsides of the economy/finance. They seem to celebrate their contrarianism if not cynicism. But that may have changed since then too.

Avl said...

Jeff, I haven't been able to get that link to Seller's piece to work. Can you post the URL too? I tried googling Mark's piece...will try again.

Jeff said...

Avl

Try this link. It worked for me this morning.

http://us.ft.com/ftgateway/superpage.ft?news_id=fto040520080000307338

Good luck!

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