TCS Daily

Financial News Nonsense

By James K. Glassman - January 10, 2002 12:00 AM

Editor's note: A version of this article appears in James K. Glassman's new book The Secret Code of the Superior Investor.

Here's the basic problem with financial journalism: Done well, it's not supposed to be all that exciting. Television, however, needs to be exciting; otherwise viewers will change the channel and watch wrestling or Jerry Springer. So CNBC, CNN Financial, Fox News and the rest try hard to make the stock market exciting, and, in the process, they do investors a terrible disservice.

The ticker is the trouble. It dominates the programs, and sets the tone. Hour by hour, minute by minute, second by second, the anchors, reporters and analysts on the shows obsess about what the market is doing in the shortest of the short term ("we seem to have leveled off here on the Nasdaq over the past 15 minutes after falling in first hour of trading"). They have to. The model, after all, is sports, and you can't imagine a sports announcer ignoring the score. But, of course, investing is not a short-term game, and the score at any moment means nothing. Instead, investing is a game in which the smart players ignore the day and concentrate on the decade.

This is not to accuse the analysts of being dumb. They are not. In general, the level of financial talent on CNBC and the others is far superior to the level of political talent on the networks' nightly news programs. Neil Cavuto of Fox is the best interviewer on TV, period. And people like Lou Dobbs of CNN, Joe Kernen and Bill Griffeth of CNBC and Terry Keenan of Fox are smart and conscientious, but the medium is the message here, and the message is that you need to pay close attention to all the little ups and downs of the market - because it all means something, even if it is hard to say what.

Here is a typical dialogue from CNN's "Moneyline," May 11, 2001. Since "Moneyline" is an evening program that sums up the day's events, it is nowhere near as frenetic as the daytime shows, but it suffers from the same disease:

Susan Lisovicz, reporter: The Dow and the Nasdaq closed with their weakest trading volume of the year, reinforcing investor uncertainty about the status of the economy and the mindset of the Fed. Willow....

Willow Bay, anchor: Susan, it's fairly typical, though, isn't it, to see investors retreating to the sidelines before a Fed meeting?

Lisovicz: Yes, it's absolutely true, but we've seen the backing and filling all week: a lot of hesitancy in the market this week [note two metaphors here - the market as backhoe and the market as person, taking on qualities in what the poet John Ruskin called "the pathetic fallacy," the illusion that things like markets react as though they were human beings] and that was underscored with the economic reports we got today. And one way you could really see it was in that low, low volume. Willow....

Bay: Susan Lisovicz at the Big Board. Thanks, Susan.

Of what possible use to long-term investors is this analysis? Zero. In fact, it is worse than zero because its message is that they need to pay attention to things like Fed meetings, low volume, "hesitancy," and "uncertainty." Often, there is no decent explanation for the aggregate movement of the 7,000 listed companies that comprise the U.S. market, but that doesn't stop analysts from coming up with one anyway.

Flash back to May 18, 1995, a day on which the Dow Jones Industrial Average dropped 82 points, or about 2 percent, after rising in the previous six months by 700 points or nearly 20 percent. Why? Opined Ed Keely, manager of Founders Growth Fund: "The number-one worry is the sustainability of earnings and how strong the economy is." Peggy Farley of Amas Securities said that "profit-taking" was the culprit; while Dan Bernstein and Ross Waller of Bridgewater Associates, using a popular tautology, declared that the market fell "under its own weight." (Little did they know, but the market was embarking on the most powerful run in its history, with the S&P 500 index returning more than 20 percent in each of the years from 1995 to 1999.)

Despite the eagerness of analysts to explain short-term market movements, there is a good case to be made that such advances and declines are essentially random - but where does that leave poor financial reporters? With no story! Trying to explain the ups and downs of share prices on a daily basis is as fruitless an exercise as trying to explain why a particular coin flip ended up heads or tails (it "fell of its own weight," guys). Investors should ignore the background noise and the fatuous explanations.

I know it's hard. The problem with stock movements is that they look like they're meaningful. In his famous 1973 book, A Random Walk Down Wall Street, Burton Malkiel presented a chart that appeared to represent the daily activity of a nicely behaving stock. Actually, the points on the chart were plotted strictly according to the outcome of coin flips. "The persistence of this belief in repetitive patterns in the stock market is due to statistical illusion," Malkiel concluded. In other words, even chance events look as though they have meaning - thus providing a nice living to people on Wall Street called "chartists" or "technicians," who look for such patterns in stock movements.

In his book, A Mathematician Reads the Newspaper, John Allen Paulos takes Malkiel a step further, noting "the surprising number of consecutive runs of heads or tails" that result from prolonged random coin-flipping (you see the same thing at the roulette table, with red and black). If you flip a coin each day for five or six years, he writes, it's likely that heads will enjoy a winning run for at least 10 days in a row. What a bull market!

"With these random clumping patterns in mind," writes Paulos, "think of the standard pronouncements of newspaper stock analysts. The daily ups and downs of a particular stock or of the stock market in general may not be as thoroughly random as these H's and T's are, but it's safe to say there is an extremely large element of chance involved.... One never hears of chance, however, in the neat post hoc analyses that follow each market's close."

Investing is tough enough without being led astray by the distractions of analysts looking so seriously at short-term prices driven, in great measure, by chance. What investors need to do is find great companies, buy them and hang onto them. So what financial journalists can do constructively is help us find good companies. Sometimes, CNBC and CNN Financial offer interviews with analysts and corporate executives that provide insight into companies and industries. But rarely. Most of the analyst jabber is equally empty, concentrating on to-the-penny estimates of quarterly earnings. Here is a typical jargon-filled CNN Financial excerpt from the "Market Call" show in the spring of 2001:

Rhonda Schlaffer, anchor: Lehman Brothers is upgrading Dow component Johnson & Johnson to a buy from a market perform... Joining us on the phone is David Gruber, the Lehman Brothers analyst who made the call on Johnson & Johnson.... Let's first talk about what you see going on with J&J that is causing you to raise the price target just a little bit.

David Gruber: Sure. There are two primary reasons why we raised our price target. We also raised our rating with a three market perform to a two buy rating. The first thing is, we see an improving competitive position with Procrit.... And secondly we see the potential for coded stents. In addition, the valuation was attractive. Our price target of $110 is a 27.5 multiple of the next 12 months EPS of $4. That is a 10 percent premium to S&P and a 9 percent discount to the pharma industry....

What does this mean? Do the folks at CNN really care whether their viewers understand? I doubt it. Again, the key is the scoreboard. If Gruber's upgrade moved the price of J&J up a little, then that's news; he's scored a touchdown, or at least a field goal, and CNN wants to talk to him. If you are an investor considering J&J (and I love the company), what can you glean from such a report? Perhaps you'll peer a little deeper into Procrit, but whether J&J is a buy or an outperformer is of no concern to you. Instead, look closely at J&J's history, its balance sheet, its current earnings and its product line.

In fact, the best rule for daytime financial television is this: Don't watch it. The messages it sends are all wrong, and they focus your attention in the wrong direction. Instead of prices - the obsession of these shows - you should concentrate on two things: the nature and performance of the businesses that underlie the stocks and the way the best stocks fit into your portfolio. Can you learn those things from TV?

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