And this applies to other outlets where “opinions” rather than facts are regularly spewed except for Bloomberg…to an extent. Bloomberg leans more towards reporting pure financial data rather than hosting analyst love fests with each touting their next best investment. But you can skip that one too. Now back to the story…
Its Sunday morning and an early riser that you are, with coffee in hand, you are about to get ready for the next week, anxiously waiting for the next hot investment tip to help you make a killing in the markets. And so you turn to your favorite finance show for tips on where to deploy that big pile of cash. The next thing you know, you got exactly what you have been waiting for. Your favorite commentator on the show just gave you (and remember, it’s only you) a hot stock tip which will open the gates to untold riches for you. The stock being touted is a small, undiscovered gem and you are about to get in on the ground floor. So after doing some superfluous research, you jump in. And then you wait. But instead of making a killing, you lose 70% of your investment dollars. To add insult to injury, you later find out that your favorite commentator was actually hired by this particular company to tout their stock. And this is a true account.
Every now and then, we are made aware of the flagrant ethical lapses in the financial media where someone, somewhere with vested interests is trying to peddle a product or a service without full and proper disclosures. Be it the host or the commentator himself or the industry experts invited as guests, it seems everyone has an axe to grind. An institutional investor might have already loaded up on an investment before coming on the show or going to the press and calling it his best investment pick for the coming year, likely influencing others to buy with the possible intent of driving the value of that investment higher. And of course, since he is already in, he can sell while others buy, essentially front-running other investors. Who can forget the dot-com mania of the 1990’s where companies with no prospects were touted by Wall Street insiders and analysts on shows like CNBC and Fox Business while at the same time, internally calling them losers (remember Jack Grubman, the de-facto deity at the time), in a way making a mockery out of the gullible investors who were loading up on these stocks. Some analysts with egregious ethics violations did pay a price by being barred from the securities industry for a period of time but the havoc wrecked on ordinary investors and their faith in the financial system was permanent.
Financial media do play a vital role in reporting on market activities, regulatory affairs and general investing news but it becomes an issue when their self-interest trump general journalistic ethics and they start peddling products and services without full and proper disclosure. And that with minimal to no accountability. The well publicized spat between Jim Cramer, the Mad Money show host on CNBC and Jon Stewart of Comedy Central puts this whole issue of media and ethics out in the open with Cramer actually agreeing with Stewart that CNBC is mostly an entertainment outlet. But Cramer still refutes the fact that shows like his and the financial media in general had a significant role to play in the losses incurred by ordinary investors who followed their advice. But the fact is that his show and other shows like his did influence the general investing public in making decisions which caused them great financial harm.
For example, back in March 2008, Cramer on his Mad Money show openly promulgated as a fact that Bear Sterns as a company is fine and healthy and is not in trouble. That was when the company was selling at $63 a share. Six days later, it was sold to J.P. Morgan Chase for $2 a share.
“Lehman Brothers is no Bear Sterns”, so the CNBC host said in a show aired on June 5, 2008, Three months later, the company went under.
David Faber of Faber Report, a CNBC show, took the words of Merrill Lynch management and reported them as facts saying that the company does not need capital infusion and actually is running a surplus. But we all wished Faber could have probed the management further and did his own due diligence instead of taking the management’s perspective at face value and reporting it as is. That was back in April 2008. Six months later, it ran out of capital.
And there are many, many such instances where opinions were reported as facts and these outlets served as an effective tool for Wall Street folks to deliver selective information they wanted investors to hear.
So what is the lesson for investors? Ideally, just switch-off. Or if you must, try watching shows which report facts rather than opinions. And even if you do listen to opinions, be skeptical and avoid treating them as investment advice. Sound investing should be based on your family financial goals and a well-articulated investment strategy and not on daily updates from talking heads in the media.
So the next time you turn on your favorite finance show, treat it as pure entertainment and nothing else. Acting on the opinions expressed could be harmful to your wealth.
Image credit – Pixabay