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.
Viewers know even less about guest experts. Guests' track records as investors are typically hard to come by, and there is little useful context with which to judge their investment ideas.
More subtle disclosures are lacking, too. For example, even though financial shows may require their guests to disclose ownership in securities they're talking about on air, a guest who was down a lot of money on a stock or bond position probably wouldn't have to disclose that fact even though that might be important information to viewers thinking about buying the same stock or bond.
Fourth, news has a disorienting effect. Multiple studies have shown that watching regular news, and screen time generally, can cause anxiety. And news content does not necessarily reflect reality: an often cited study by the Center for Media and Public Affairs found that the 1990s saw huge increases in coverage of crime stories on network TV, despite the fact that crime actually dropped during the period. What subject matter is overreported on financial news is anyone's guess.
With this perspective of financial news, investor types might focus on the words of investment policy guru Charles Ellis. In his book “Investment Policy: How To Win the Loser's Game,” he posits that: “[People] can do more for their portfolio's long-term rates of return by developing and sustaining wise long-range policies that commit the portfolio to an appropriate structure of investments than can be done by the most skillful manipulation of the individual holdings within the portfolio.”
That is a reminder that today's big idea, as revealed by hosts and guests on cable news and acted upon by the viewer, may be a hindrance to long-term investment success. Rather than succumb to temptation, the key, in Ellis' words, is to “not be thrown off by the confusing daily events that present themselves with such force.”
It is easy to be confused by the swirl of investment ideas and recommendations on financial news — the presentation is so compelling that substance sometimes seems of secondary importance. And contradictory opinions are rife. With an appropriate filter, though, viewers can enjoy content that is often educational and genuinely interesting and fun. They just need to keep in mind that should they decide to be a buyer of a stock after hearing about it from an expert on TV, that the talking head may be their seller.