The financial media: investor friend or foe?

Las Vegas pays off for fund manager

I’ve just enjoyed six weeks holiday, purposely avoiding exposure to the financial media. Back to work again and it wasn’t long before two pieces of financial journalism caught my attention.

One reinforced my perception of most financial media as irrelevant and distracting “noise”. The other should be read by every serious investor and referred to any time they are tempted to stray from a well conceived, disciplined investment strategy.

The first was an article titled “Vegas a winner for Australian fund manager” by John Collett in “The Age” of 4 July 2013. It describes how Sydney fund manager, PM Capital, returned over 63% for the financial year ending 30 June 2013, “largely through playing the recovery in Las Vegas house prices”. It notes the manager’s Absolute Performance Fund was the best performing global share fund for the year by a large margin.

It goes on to describe how the fund manger identified the potential for recovery in the Las Vegas property market and then took a small number of large positions in US shares that it thought would benefit from any such recovery. While the article does not recommend investing with PM Capital, there is some implied credibility given to the views of founder, Paul Moore, that “the recovery in US house prices will continue for at least another five years, and perhaps another 10 years.”

Even as a hardened investment adviser with a strong, robust investment philosophy, my initial emotional responses to the article were along the lines of:

• I’d like to get an annual return of 63% on my investment portfolio;
• It was obvious that US housing prices would rise and the Australian dollar fall against the US dollar, making the housing play a “no-brainer”; and
• PM Capital was really smart to exploit the opportunity.

However, before leaping to the next potential conclusion that I should invest with PM Capital, the logic of our investment philosophy quickly prevailed:

• The PM Capital strategy was a highly concentrated, high risk bet – it’s amusing that its success was so directly associated with Las Vegas;
• A highly diversified US share index fund would have returned a very impressive 36% for the 12 months to June 2013. If your portfolio is structured to be able to significantly outperform the total share market, it also exposes you to the risk that it could greatly underperform; and
• The fact that PM Capital returned about 63% for 2012-13 says nothing about its future relative performance. While PM Capital may or may not be a skilled fund manager, it takes many years to confidently distinguish skill from luck.

In summary, the article is simply information that should have no bearing on sensible investment decisions. But, unfortunately, it will appeal to the greed motive of undisciplined investors who will want to jump on the bandwagon, potentially after the best returns have been achieved. It represents the dominant arm of financial journalism that aims to titillate, rather than educate. Its power to inadvertently harm is immense.

Saving investors from themselves

In complete contrast is Jason Zweig’s article, “The Intelligent Investor: Saving Investors From Themselves”, from “The Wall Street Journal” of 28 June 2013. Zweig is an award winning personal finance journalist and author who has spent much of his working life trying to change what is, predominantly, poor investor behaviour.

The article appears to be written in response to his recent receipt of a prestigous Gerald Loeb Award. These awards “are among the highest honors in journalism, recognizing the work of journalists whose contributions illuminate the world of business, finance and the economy for readers and viewers around the world”[1]. The article explains the motivation for Zweig’s writing.

While it should be read in its entirety, I have here provided some selected quotes. It starts as follows:

“I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times in such a way that neither my editors nor my readers will ever think I am repeating myself.

That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”

Perhaps he had articles like that discussed above in mind when he notes that:

“Everyone wants to chase the returns of whatever has been the hottest and to shun what has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to the basic principle of marketing: When the ducks quack, feed ’em.”

Based on his philosophy that investment returns “regress to the mean” i.e. periods of above average returns are followed by periods of below average returns, Zweig explains:

“I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.”

In response to any latest fad investment theme, he writes:

“But this time is never different. History always rhymes. Human nature never changes. You should always become more skeptical of any investment that has recently soared in price, and you should always become more enthusiastic about any asset that has recently fallen in price. That’s what it means to be an investor.”

Don’t rely on the finance media for financial advice

Most financial journalism is simply reporting information, dressed up and delivered with appropriate gravitas to give the gullible consumer the impression that valuable insights are being provided. As someone much wiser than me observed:

“Data isn’t information, information isn’t knowledge and knowledge isn’t wisdom”.

[1] Quote from “UCLA Anderson School of Management Announces 2013 Gerald Loeb Award Winners”.