What You Need to Know Before Reading Financial News

Your limits vs. the media's ambitions.

Jul 11, 2014 at 11:00AM

Reading financial news is a skill. Honing that skill reminds me of a great psychology story.

At the start of each one-year term, the new president of the American Psychological Association shares their vision for how to change the field.

In 1998, incoming president and University of Pennsylvania psychologist Martin Seligman's vision was simple: For decades, psychology focused on negative disorders like depression and anxiety. Psychologists brought patients from below average to normal, or from "a minus five to a zero," as Seligman put it.

That was noble, but it meant psychology ignored the majority of society who weren't suffering from mental disorders. "I realized my profession was half-baked," Seligman said. "It wasn't enough to nullify disabling conditions and get to zero. We needed to ask, What are the enabling conditions that make human beings flourish? How do we get from zero to plus five?" This sparked a boom in the field of positive psychology, or studying what makes normal life more fulfilling.

The financial media may be in the opposite position today.

Most investing commentary is focused on how to bring investors from average to above average -- from zero to plus five, in Seligman's terms. And that's great! Many can benefit from it. There are a lot of brilliant financial minds you can learn from. If you're an avid investor, today's financial media is probably the best it's ever been.

But as Seligman realized with psychology, a singular focus can leave a profession half-baked. It can actually alienate most people who need the opposite kind of help.

And most investors do need the opposite kind of help.

According to research firm Dalbar, the S&P 500 returned 9.22% per year from 1993 to 2013, but the average stock investor earned just 5.02% per year. This gap represents the average investor constantly buying and selling stocks at the worst possible times. They're a minus five, and need help getting back to zero. Most investors don't need help trying to beat the market. They first need protection from beating themselves. 

If you don't realize the difference between the two, you may not realize that the financial media industry looks something like this:


Understanding this chart is your own responsibility. Not the media's. Yours.

There was nothing unethical about psychologists focusing on depression and anxiety before Seligman pushed them toward the happy masses. Doctors were utilizing their talents, even if it left out most of the population. If a lay person reads an article about depression and wrongly self-diagnoses and self-treats themselves, that's their own fault.

Josh Brown, one of the smartest investors and best financial writers I know, told me recently that the same is true for financial media:

Let me tell you something interesting about financial media. Of all the verticals across different types of news, financial media is the only one where there's supposed to be some sort of responsibility that comes along with it. When you think about fashion, art, sports, Hollywood gossip – huge categories of news that dwarf financial news – there is no responsibility. People don't watch ESPN and then think they're supposed to go out and play tackle football with 300-pound guys. But when they watch financial or business news, they take the next step and say, "Well I'm supposed to act on this now. I'm supposed to do something about this."

Part of that is the fault of the media. The word "actionable" gets thrown around a lot. Actionable for who? Oh I don't know, it's just actionable. But a lot of the responsibility is on the public. And I think what most people do incorrectly is they focus on the news of the day, the stocks that are moving on a given day, whatever is driving the markets now, but they've got no background whatsoever about how to invest.

Everyone who reads financial news has an obligation to know about themselves what the pundit can't: Your own risk tolerance, age, job security, time horizon, and level of expertise, to name a few. You have to know these yourself so you can understand what kind of financial media is relevant to your needs, and what isn't. Otherwise, you might be a perfectly happy person reading an article about depression, wondering when you should see a doctor.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

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