Financial news shows are run as a business — for profit. But unlike most other news broadcasts, financial news provides viewers with a lot of information that they can actually use, and not necessarily to their benefit. Viewers who act on stock picks and other investment ideas that they hear about on TV are putting real money at risk.
Before one trades based on “expert” opinions learned via financial news, it's worth considering the dynamics of such television, none of which may work to the interest of the long-term investor: First, that content is affected by the network's need to make a profit; second, that guests have their own motivations, which are not necessarily the same as the viewer; third, that the opportunity for disclosure on TV is limited; and, fourth, that TV news generally has disorienting effects.
First, the content of cable financial news is affected by the network's need to make a profit. According to Wendy Brunner, assistant professor of mass communications at Oklahoma City University and a former broadcast journalist, some cable news networks are likely to contain even less of what most journalists would consider ‘news' than evening national and local news broadcasts.
The infotainment factor — in Brunner's words, “attractive TV hosts interviewing attractive guests who have written shiny new books and who are saying sensational and very interesting things” — by definition overemphasizes some facts and qualities that are unhelpful to a person trying to understand how to approach investing.
Second, guests on cable news — whether they are CEO's, analysts, portfolio managers, etc. — have their own motivations for what they say on the air. Much of the time, they are “talking their book,” i.e., arguing in favor of an opinion — often literally a position in securities that they or their firm has taken or a product they are selling.
So long as they believe that what they're saying is true, guests are generally permitted under the law to go on TV and announce that they like a stock, even if they stand to benefit should viewers decide to buy the stock and the stock price goes up as a result.
Third, the opportunity for disclosure is limited in TV. Viewers don't have a lot of information to go on when they make an investment decision based on cable news. If you watch Jim Cramer's show on CNBC, for example, you might be taken with the commanding and entertaining style with which he communicates his ideas. He is an experienced investor and no doubt shares ideas one could profit from. But by the metrics that matter to long-term investors, his performance has not been so hot.
Mark Hulbert, editor of the respected Hulbert Financial Digest, compared the performance of Cramer's “Action Alerts” for 2009, 2010 and 2011 with overall market returns for those years, and found that Cramer underperformed the market by an average of 5 percent per year. An earlier 2009 study found that aping Cramer's ideas was “harmless,” not exactly a ringing endorsement of his stock-picking prowess.
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