Financial reality and the media hordes

  • September 7, 2011

A few months ago, my colleague Fr. Raymond de Souza began a column about fashion trends in wedding dresses by recalling the old adage “fools rush in where angels fear to tread.” Perhaps a similar caution is in order in this case.

My formal training in math ended sometime in the ninth grade, and my investment experience could be printed on the back of a business card. Nevertheless, the peaks and valleys in global markets in the past few years have made more than one person wonder if the media have played any role in how fast stock values have changed and how quickly people reacted, possibly setting up a self-fulfilling prophecy.

In early August both the Dow Jones and the TSX dropped more than 500 points in a single day, wiping out almost all the much-awaited gains of 2011. The media response would have been difficult to ignore for anyone near a television or computer screen at the time; all the news networks and cable stations filled instantly with talking heads, many of them belonging to the same analysts who had tried to explain the even-worse disaster of 2008. Since there was no quick fix then, it’s unlikely there will be one now, but people continue to look for one, or at least look for a simple explanation for why this is happening.

The money-and-markets experts tend to play down any impact the media might have on market trends, certainly for full-time traders and other institutional investors. Dan Gross, economics editor at Yahoo! Finance, believes that any impact would be minimal because a large amount of trading volume is driven by machines, computers and pre-set trade orders. “The computers definitely aren’t watching cable news. Market activity is driven largely by professionals, who are watching their data screens and usually have CNBC on with the sound off. They’re not listening to what the hosts are saying.”

Some concede that a herd mentality may play a role, especially in the last few moments of a trading day. “No one wants to be the last one out,” observed Charlie Gasparino, senior correspondent for Fox Business Network, who nevertheless says media coverage is not a significant factor in markets.

People who routinely move around millions of dollars between sips of coffee probably don’t rely too much on media opinion, but for the small, individual investor it might be a different story. Many believe that the financial media are not doing enough to educate investors about market realities, and point to events of the past decade, especially the bursting of the U.S. housing bubble. Columbia Journalism Review is one such voice. It says business coverage must change to meet the needs of a new audience.

The reality is many more people follow markets today than in the past. There are also many more media outlets than even a few years ago, and obviously blank space and dead air isn’t an option that would please advertisers. It may be that people put too much trust in financial gurus, but the topic is complex and you can hardly blame people for seeking out professionals advice.

Given that almost all small investors saw their portfolios shrink during the past three years, and that many Canadians have no private pension to supplement what they will get from Canada Pension and Old Age Security, few would dispute the need for education. It’s less clear who should provide it. The self-interest of the company spokespersons is an obvious limitation, and most professionals with expertise in the area have products to sell and probably quotas to meet. Parents and high school teachers who give lessons about the importance of saving for the future and paying off credit cards on time are probably teaching more valuable lessons than the market gurus ever will.

Whether our investment portfolios feature multi-sheet printouts or just those penned-in lines on a business card, there is one investment fact almost everyone knows but hardly anyone believes until it happens to them: The potential for greater returns means higher risk. Many people have been learning that lesson the hard way.

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