Chapter 11
FYI, the Media Doesn't Care If You Make Money
And now we reach the crux of this book. Remember, your objective is to ignore all the mayhem that surrounds you so that you can focus on time-tested principles designed to pave the way to long-term financial freedom. This is difficult because even once you've identified your emotional biases you still need to accept that they will never be completely eliminated. You are human after all. The best you can hope for is to reduce the impact of emotions and set up systems and processes to allow the logical, rational part of your brain to win out.
As you've hopefully gathered by now, one of the most important things you can do when it comes to managing your emotions is to have a written plan in place. This plan should be constructed at a time when you are thinking clearly. This is the best environment to lay out reasonable steps to meet your financial goals. The written plan then becomes the template you refer back to when your emotions urge you to do something that may not be in your long-term best interests.
But Then There's the Media …
Having a written plan in place becomes even more important when you consider the constant barrage of media headlines you're subjected to, as well as the fact that those media headlines are specifically designed to exacerbate your behavioral biases. You are more likely to be deeply engaged when your emotions, rather than your intellect, are stimulated. The media knows this and so, in addition to providing you with information, they also try to excite you, or frighten you, or motivate you, or sometimes even offend you.
Think about that last one for a moment. Polarizing media figures such as Glenn Beck, Rush Limbaugh, or even Howard Stern are well known for their controversial, and sometimes offensive, content. There is even a term for this, and media figures known for extreme views are often referred to as “shock jocks.” But – and here is the important part – while some love them and others loathe them, these controversial figures have one characteristic on which all can agree: they are hard to ignore.
The reason they are hard to ignore is that people connect with them on an emotional level. Their supporters love them. Their detractors hate them. But almost no one who tunes in walks away not feeling something. And because of that, listeners, viewers, and readers come back for more.
They come back for more.
And that, my friends, is what the media wants. They want you to come back for more.
Here's a little hint for analyzing many things in this world: if you want to know how people are going to act, figure out how they get paid. Yes, that sounds cynical, and it certainly isn't always true. But I think it often is, especially in the corporate world.
With that in mind, ask yourself, how does the media get paid?
The answer is that the media gets paid for having a larger and/or more engaged audience. In other words, they get paid for attracting and keeping eyeballs. And the single best way to attract and keep eyeballs is by entertaining folks. Because entertainment engages people on an emotional level, which in turn leads to an audience that comes back for more.
The financial media is no different than any other media, so let me be very clear on this – the purpose of much of the financial media is to entertain and inform, in that order. That doesn't mean that the financial media isn't providing you information. It also doesn't mean that they are making up stories or lying to you. What it does mean is that when they are providing you information, they are going to strive to convey that information in a way that pulls you in and makes you want to know more. Sometimes that might also involve making you feel anxious or afraid. Sometimes that might also involve feeding your desire to keep up with the Joneses.
Oh, sure, the information is there, and if you were a robot you'd simply slice your way through the surrounding fluff, extract the nugget of information you need, coldly and rationally analyze that information, incorporate it into your decision matrix, and act accordingly. But you aren't a robot and so the way in which the information is presented is going to impact how you view that information and what you do with it. If that concept sounds familiar, it's because we discussed it in the previous chapter when we discussed the behavioral bias known as framing.
The financial media are masters of framing information so that you react to it more strongly than you probably should. For example, if you were to spend eight hours watching CNBC on a relatively slow news day, you'd still witness dozens of breaking news alerts and other assorted big events. These breaking news alerts might include:
- A news conference held by the president of one of the regional Federal Reserve banks (For the record, there are 12 such regional banks, each with a president holding periodic news conferences. This is in addition to the seven members of the board of governors, which includes the Federal Reserve Chairman.)
- The release of weekly natural gas inventories, which tend to fluctuate based on wintertime temperatures in the Northeast and Midwest
- An earnings release from companies such as Oracle, McDonalds, Caterpillar, or Walmart
- Economic data such as the producer price index (not to be confused with the consumer price index) or monthly housing starts (not to be confused with monthly housing permits)
Of course, in reality, the average investor probably doesn't care whether or not the president of one of the regional Federal Reserve banks just finished giving an interview or that the weekly natural gas inventories number was just released. Neither of these events is likely to impact the performance of an investment portfolio over time or make any difference about whether you achieve your financial goals.
But, on the other hand, no one is going to tune into CNBC to watch an anchor say something along the lines of:
That approach wouldn't attract eyeballs and it wouldn't sell advertising. Instead, the anchor will try to make every story seem critically important in order to generate excitement, attract and retain viewers, and increase advertising sales.
And that's where framing comes in. Because the anchor's actual verbiage, based on the exact same information as earlier, will probably be something like this:
Well folks, we're entering the middle of the trading day and we've got a lot going on up and down Wall Street. Natural gas inventories spiked 1.2%, causing prices to drop sharply before recovering. Right now, prices are basically unchanged on the day. We also had the president of the Kansas City Fed talking about the long-term impact of supply chain bottlenecks on the railroad industry. Bond prices reacted, with 10-year interest rates spiking two one-hundredths of 1%. Volume is light on Wall Street with a lot of traders out on summer vacation, which is leading to thin trading and increased volatility. This could lead to a sharp move higher or lower in the next month.
Both those monologues relay the same basic information, but ask yourself which is more likely to have you put down the remote and stay tuned in?
I don't know about you, but that last line about how there could be “a sharp move higher or lower in the next month” has me a little bit excited and a whole lot nervous. In fact, I'd better stay tuned in to find out more, because I definitely want to know if a sharp drop is coming next month.
And bang! Now they have me. Now I'm sucked in because I sure as heck want to know about that sharp drop that might, or might not, be coming.
Never mind that the anchor didn't convey information that was any different than in the first monologue. And never mind that the anchor told me absolutely nothing about where the market might be headed.
Well, no kidding. There is always the possibility of a sharp move up or down. Saying so on TV doesn't change that. It neither increases nor decreases the odds of a move higher or lower. It conveys no new information. It should in no way impact my portfolio or my future finances. It certainly doesn't change my future tax planning.
If it doesn't do any of those things, what does it do? You guessed it. It grabs me on an emotional level and pulls me in. Now I have to watch to see what might happen. After all, my future is at stake! And I'm afraid.
And fear sells. Greed and the urge to keep up with the Joneses sells, too, but not like fear. The more worried you are, the more you watch. Think of the last time a politician you disliked ran for office. The more worried you were about what they might do in office, the more you probably tuned in. It's like watching a train wreck that you can't take your eyes off of.
Your finances are no different. The more worried you are, the more you tune in. Don't believe me? Take a look at Figure 11.1.
The financial crisis was the greatest thing that ever happened to CNBC. People tuned in and then couldn't look away. They were worried their futures would be destroyed and they wanted to watch it happen live. Then, markets started to recover and a long bull market got underway. And folks stopped watching. Now that they weren't going to be destroyed, they didn't care anymore.
The bottom line is that fear sells. The media knows that and so they follow the number-one rule of business, which is simply that a business should give their customers what they want. People seem to want fear, so the media gives you fear.
There is nothing at all wrong with this; it's how media outlets stay in business and make money. But it's important for you to keep in mind that, for all the reasons discussed in the previous chapter, you are susceptible to flawed decision-making based on irrational fears. It's also vital that you know that the media is going to flame those fears in an effort to drive viewership.
Figure 11.1 Stock Market Movements and CNBC Viewership
SOURCE: Analysis by Brian Perry. Information from Guardian Wealth Management.
The key then is to use the media for information, but not get overly swayed by the framing. Because its not the way the information is conveyed that will harm you. Nor is it your emotions. What will destroy your finances is allowing your emotions to force you to act on the information you take in. Therein lies the greatest threat you face on the road to financial freedom.
Did Black Monday Spell Doom for Investors?
Despite how they are framed, the vast, vast majority of every financial news headline ever written will literally have zero impact on your future. Furthermore, even news events that really are important are unlikely to impact most long-term investors. Remember, there is a world of difference between the approach used by a professional trader and that used by the average individual investor. Neither is good nor bad; they're just different. Wall Street professionals are measured on quarterly or annual performance, so short- and intermediate-term market fluctuations matter. After all, a single news item can impact their careers.
But it's different for individuals. As an individual investor, you should only have money sitting in risky assets if you have a long time horizon. If you are likely to need the money within, say, the next five years, you shouldn't own risky assets. Funds needed in those shorter time frames should be in less volatile asset classes such as money market funds, savings accounts, CDs, or high-quality bonds.
If your investment time horizon stretches further, then you can begin to consider riskier asset classes such as stocks, real estate, natural resources, and lower quality bonds. Of course, if you have that long-time horizon, shorter-term fluctuations shouldn't have too much of an impact on your ultimate success. Think about it this way: a 50-year-old individual saving for retirement probably has a 30- or 40-year time horizon for some of their investments. And let's face it, if your time horizon is three or four decades, a single day's stock price movements are unlikely to have much of an impact on your success.
Don't believe me? Well, here's a pop quiz: on Black Monday, October 19, 1987, the Dow Jones Industrial Average fell more than 22%, a decline that as of this writing remains the largest single-day collapse in U.S. market history. And that drop occurred only 10 weeks before the end of the year.
To understand just how catastrophic Black Monday was, consider that during the Financial Crisis of 2007–2009, the largest single-day percentage decline in the Dow was less than 8%. In other words, the Black Monday market crash was nearly three times worse than any day you enjoyed during the more recent Financial Crisis. Black Monday wasn't a bad day. It was a disaster.
So, let me ask you, following the worst day in its history, do you think the Dow finished 1987 in the black or in the red? In other words, was the Index up on the year or did it finish with an annual decline?
SOURCE: Pixabay.com
The answer, somewhat counterintuitively, is that in 1987 the Dow actually finished up for the year. And while it never makes sense to draw too many conclusions from a single data point, I do think it's instructive that even in the face of a 22% collapse, the impact of a single day's movement didn't sink the market's annual performance. And if we extend the time frame further, the 1987 stock market crash barely registers as a blip on the radar.
Again, on Black Monday the Dow lost nearly a quarter of its value in a single day, but in Figure 11.2 the decline is barely even noticeable. Staying the course despite such a massive single-day loss would admittedly be difficult, but investors who did so remained on track to meet their financial goals. And remember, as an individual, you have the advantage of not having to report quarterly or annual returns.
Most important of all, and as discussed throughout this book, you should be measuring your performance to plan, not versus some arbitrary market benchmark. This allows you to focus less on daily market fluctuations and more on whether your portfolio is generating the kind of returns you need to meet your financial goals.
Figure 11.2 The Impact of a Single Day On Long-Term Returns
SOURCE: Based on data from Measuring Worth.com and Dow Jones.
What Side of the Aisle Are You On?
Hopefully by now you're convinced that breaking news alerts and short-term market movements are relatively meaningless in the scope of your financial planning. Accepting this fact should alleviate 99% or more of your need to consume financial news or track market events. And again, the news of the day does have an impact on financial professionals. In fact, part of my job involves staying on top of the latest headlines and market movements. But you, as an individual, have the significant advantage of being able to ignore the headlines and focus instead on tracking your longer-term progress toward your financial goals.
But let's assume for the moment that although you realize that you don't need to follow the news in order to manage your finances, you want to do so. Maybe you enjoy being on top of things. Maybe it's interesting to you. Maybe you find the daily news flow intellectually stimulating.
If you choose to track the news of the day and how it might impact your finances, it is imperative that you consider the source of that news and any biases or tendencies the source might have. For example, I think it's pretty commonly accepted that Fox News and its affiliates tend to lean toward the political right while MSNBC tilts to the left. So it stands to reason that, given a news story, Fox News and MSNBC might have somewhat different slants on how they cover that story. Figure 11.3 shows why that matters.
Figure 11.3 shows the results of a poll of Republicans and Democrats on their view of the economy. As you can see, Republicans became far more optimistic in the months following the election of President Trump. Similarly, Democrats grew more pessimistic when their chosen candidate didn't win.
For starters, it's important to note that none of the individuals polled were actually wrong. When dealing with opinions and expectations, there is of course no right or wrong. People are entitled to believe and think whatever they want.
However, and this is the important point, it does seem unlikely that economic prospects for half of Americans collapsed in a six-month window while those for the other half of Americans surged. After all, even though the political climate in the United States is incredibly fractured, we certainly aren't in an environment where a newly elected president sets out to destroy the economy for half of the country's citizens.
Figure 11.3 How Politics Impacts Economic Outlook
SOURCE: Based on data from Pew Research Center and JP Morgan Asset Management.
Taken to the absurd, Figure 11.3 might make sense if a new president forced businesses to fire all workers who voted for the other candidate. But we're a long way from that scenario.
I hope!
The more logical explanation is that Republicans were more likely to consume media from sources that lean right of center. These sources were more likely to paint an optimistic outlook for the country and the economy if the Republican candidate won and his economic policies were enacted. Democrats, on the other hand, were more likely to get their news from sources casting a downbeat assessment of the future, given a Republican victory.
Importantly, the truth was probably somewhere in the middle. Although presidents certainly have power, their ability to enact wholesale changes is intentionally limited. Even the most powerful presidents need to navigate the House of Representatives and the Senate, not to mention a host of powerful federal bureaucracies filled with lifelong staffers carrying out their own agendas. The entire governmental system was designed in order to avoid drastic policy fluctuations.
Furthermore, the government as a whole only has so much impact on the direction of the economy. Private businesses, both big and small, make decisions each and every day that shape the course of economic growth. And consumers, deciding each day what purchases to make or avoid, ultimately have the greatest impact on the economy. In fact, by some measures, consumers are responsible for 70% of the country's economic activity.
What that means is that although economic data may have improved slightly during the period following Trump's election, the economy as a whole probably didn't surge to the degree Republican opinion would indicate. Similarly, the data probably didn't collapse in a manner consistent with the plunging economic outlook prevalent among Democrats.
The reality, as in many things, was probably somewhere in the middle.
Okay, let's bring this conversation back to your finances and why you need to be careful about letting the media unduly impact your decision-making. The bottom line is that it's perfectly fine to hold political views and opinions on the direction the country or the world is headed in. The important point is to avoid letting your opinions of the way things should be override the reality of the way things actually are or the way they are likely to be. In other words, if a politician you don't like is in office, it's important to assess the likely direction of the economy and markets regardless of whether you personally agree or disagree with the politician's policies.
Furthermore, if you're ignoring the mayhem and following the concepts laid out in this book, you probably won't need to change your strategies regardless of who is in office. Now, to be fair, some of your tactics might shift slightly if a politician raises or lowers taxes, or a politician's policies cause the economy to grow or contract much more than usual. But your basic financial roadmap and the strategies you utilize to follow that map shouldn't change, regardless of the mayhem going on in the current political circus.
Figure 11.4 Stock Market Performance by President
SOURCE: https://www.macrotrends.net/2481/stock-market-performance-by-president.
This is particularly true because it turns out that stocks have mostly moved higher regardless of what party is in office. This makes sense given the upward momentum of markets over time. In fact, despite dire predictions, Figure 11.4 shows that no presidential regime in the past four decades has spelled doom for your portfolio, which is a valuable lesson to keep in mind next election cycle.
Unfortunately, though, you'll now see that politics isn't the only news arena that would make Barnum & Bailey proud.
Would You Hitch Your Family's Future to the Circus?
Maybe you're familiar with Jim Cramer, the host of Mad Money on CNBC. Mr. Cramer is quite knowledgeable about markets, having worked at Goldman Sachs and run his own hedge fund. He shares this knowledge with his audience, exhorting them to buy or sell stocks based upon his opinions of future market movements.
There's nothing wrong with this, and in fact Cramer's background actually makes him better suited for financial journalism than many media pundits who have little or no actual investment experience. But before you rush to act upon Cramer's recommendations, consider a couple of items.
First of all, much of what Cramer recommends is what I would classify as short-term trading. And as I've repeated throughout this book, I believe that the average individual should eschew short-term trading in favor of long-term investing, which is a completely different endeavor and one which I believe holds far better prospects for success.
Secondly, because of the nature of his position, you may not get both sides of the trade from Cramer. For example, pretend that Cramer recommends stock XYZ on his television show. Presumably he's done his research and has a sound basis for his recommendation. And let's say you act on his advice and go out the next morning and buy the stock he recommended.
Okay, fine. But let me ask you something. When will you sell the stock? After all, this is a trade, so you don't plan to hold it forever. In fact, the very definition of a trade is that it has an entry point and an exit point, both of which should be identified in advance. And Cramer himself may not like the stock forever. At some point the rationale for the trade might change, or the stock may appreciate to where it's no longer attractive, or a better opportunity may come along. The problem is that there isn't time on a TV show to review every single previous suggestion and tell viewers whether they should continue to hold the stock. And so even if the initial buy suggestions are valid, viewers are left to their own devices to figure out when to exit their position.
Additionally, all investors have a finite supply of dollars to put to work. This is important because it means that even if the stock you bought does well, your purchase may not have been a good thing. That is because in order to buy that stock you had to either (1) forgo buying a different stock or (2) sell a different stock and use the proceeds to purchase your new stock. Remember, you are trying to build a portfolio, not a collection of stocks. And whoever is giving you advice on TV doesn't know what other holdings make up your portfolio.
But you can't analyze your stock purchase in a vacuum. Instead, you need to analyze that purchase relative to how it complements your other holdings, as well as the opportunity cost of not owning the other choices available to you. Ultimately, you can only determine that purchasing the stock was a wise move if, and only if, your new stock purchase complements your existing holdings and is also better than the alternative choices you have forgone.
What all the above means is that there are two hurdles to surmount if you want to follow Mr. Cramer's (or any other TV journalist's) advice. The first hurdle is that the recommendation needs to be a good one, and the stock needs to act as expected. This is not an insurmountable obstacle, but as has been discussed throughout this book, forecasting stock movements with greater precision than all other market participants is an exceedingly difficult task. But again, this is not an impossible obstacle.
The problem is the second hurdle, which is insurmountable. The second hurdle is that Mr. Cramer needs to have known all the other positions in your portfolio, the alternative stocks available to you, and your financial goals and risk tolerance. If he knows all of that and still thinks the stock makes sense for you, then you have crossed hurdle number two.
But of course, no TV host or other media outlet could ever know all of that about you and your portfolio. And so, even if Mr. Cramer's recommendations pass hurdle number one and beat the market, they still cannot hope to pass hurdle number two.
That's why financial advice aimed at a general audience must, by its very nature, focus on broad concepts rather than specific recommendations. This book is no different. If I were meeting with you in a one-on-one setting, I might recommend a specific portfolio or a specific tax strategy to you. But of course I'm not meeting with you one-on-one. And just like a CNBC host or writer for the Wall Street Journal, I don't know the particulars of your financial situation. And so I avoid making specific recommendations that may or may not be appropriate for you. Instead, I focus on strategies and concepts that almost all individuals should consider and can benefit from. Then, you can take those concepts and, either on your own or with the help of your financial professionals, you can implement them in a manner that makes sense for you.
Far too many people lose sight of this important distinction and instead take recommendations made in a book or on TV and apply them to their own situation without first considering whether those recommendations fit their unique circumstances.
Before moving on, I want to make one final point regarding financial journalism in general and Mr. Cramer in particular. But first let me segue by asking if you've ever watched The Jerry Springer Show? You know Jerry Springer, the former mayor of Cincinnati turned daytime talk show host. The same Jerry Springer who brought us such thought-provoking and meaningful show segments as:
- “A Man Marries a Horse”
- and
- “The Kung Fu Hillbilly”
You're no doubt wondering what Kung Fu hillbillies and men marrying horses have to do with investing, and the answer is: ABSOLUTELY NOTHING!
Which is why you might be interested to know that the producer of Jim Cramer's Mad Money used to have a different role prior to joining CNBC. That role, in case you haven't guessed, was as producer of The Jerry Springer Show.
And so, I'll repeat the question I asked as the header to this segment: Would you hitch your family's future to the circus? Because some people find circuses entertaining, just like some people find Jerry Springer entertaining. And just like some people find Jim Cramer entertaining.
If you're one of those folks, and you enjoy financial entertainment, then great.
But I strongly suggest that you think long and hard before committing your future to an industry that exists to entertain, attract eyeballs, and sell advertising.
You'd be far better off creating a financial roadmap and identifying time-tested strategies designed to meet your financial goals regardless of the mayhem that surrounds you. Then you can either implement those strategies yourself or find a trusted professional to help you tune out the mayhem, manage your emotions, and reach your financial goals.