What You Need to Know Before Reading Financial News

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. 

 


Read/Post Comments (9) | Recommend This Article (37)

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  • Report this Comment On July 11, 2014, at 1:47 PM, KayakerRW wrote:

    Morgan,

    I agree with your basic points, especially those in the last paragraph. However, Josh Brown’s comparison of the financial media with ESPN seems to be a false equivalence.

    When ESPN covers a football game, its announcers and analysts clearly state what the two teams are doing well and doing poorly and how that affects the outcome of the game. They also emphasize how the athletes are better physically than most of us in terms of size, speed, and training. They don’t encourage viewers to drive to the stadium and try to enter the game in order to affect the outcome or pick up a huge NFL sized paycheck.

    Many in the financial media (especially on cable) do encourage viewers to get in the game with emphatic “buy” or “sell” recommendations. A significant amount of time is spent predicting trends and what traders should do as opposed to trying to inform viewers and analyze trends.

    Most sports announcers spend more time criticizing poor decisions about professional athletes, managers, and team owners than cable financial analysts do with regards to companies and their CEO’s.

    If ESPN devoted most of its broadcast time to telling viewers how to place bets on the big athletic contests, then it would be similar to CNBC and similar financial news.

    I agree that people need to read more and determine if most financial news really applies to them. There is also a need to cover more basic financial decisions such as how to select a good index fund; something many people know nothing about.

  • Report this Comment On July 11, 2014, at 1:56 PM, TMFHousel wrote:

    <<Many in the financial media (especially on cable) do encourage viewers to get in the game with emphatic “buy” or “sell” recommendations. A significant amount of time is spent predicting trends and what traders should do as opposed to trying to inform viewers and analyze trends.>>

    True, but this is where it's your own obligation to realize that you're not a trader and shouldn't be taking their advice.

  • Report this Comment On July 11, 2014, at 2:56 PM, SwampBull wrote:

    The only actionable news is a 10K, and even then only when you are already holding four more of them in your hand.

  • Report this Comment On July 14, 2014, at 9:09 AM, DavidDavis wrote:

    You should always find alternative sources. I invest in upraising companies like ALPHALA

  • Report this Comment On July 14, 2014, at 9:14 AM, brigidl wrote:

    The only advice investors need to know is 'Don't watch that stuff, its misleading, you can't learn the basics of investing from TV. TV programmes are for entertainment and getting more eyeballs making money for the station'

    Neither can you learn how to play football by watching big games on TV.

    Investors already have enough info from Fool.com. buy stock in good business, cheap and keep it for a long time. End of lesson.

  • Report this Comment On July 14, 2014, at 9:31 AM, KayakerRW wrote:

    <<True, but this is where it's your own obligation to realize that you're not a trader and shouldn't be taking their advice.>>

    <<The only advice investors need to know is 'Don't watch that stuff, its misleading, you can't learn the basics of investing from TV. TV programmes are for entertainment and getting more eyeballs making money for the station'>>

    I agree with both of these statements, which is why I read a lot (and not just financial news).

    I still think TV sports journalism does a better job of providing some useful information about sports than most of the cable financial shows do when it comes to providing useful financial information, though.

    In either case, Americans would be better off reading and participating more than watching on TV.

  • Report this Comment On July 15, 2014, at 11:48 AM, ScoopHoop wrote:

    Very interesting. I think the biggest problem in America is the lack of basic financial education and the discipline to follow it. Young people do not balance check books anymore, they do everything online. Many people do not have savings accounts. The mantra that my grandfather taught me -- live below your means -- is considered old school. Borrowing money for education, cars and vacations is considered "OK" by too many people. I know many college educated people who still have a negative net worth in their 40s because of extreme debt levels. The notion of pay as you go -- or not borrowing money -- is almost anti-American. It's as if you need to be an extreme rebel and go against the grain in order to get ahead. And that is why so many people are broke. Millionaires are only 5 to 8 percent of the population. They are getting richer because they figured it out. The gap between the rich and poor will only get wider unless the vast majority of Americans change their ways.

  • Report this Comment On July 15, 2014, at 12:39 PM, DavidDavis wrote:

    We need to know that we mustn't believe the hype

  • Report this Comment On July 17, 2014, at 8:09 PM, notyouagain wrote:

    If most people buying individual stocks are trying to find undervalued stocks that will appreciate and give them capital gains, then they are depending on the consensus of the herd to drive their return.

    Seeking capital gains makes you forever dependent on the herd.

    Companies with sustainable competitive advantages, a low to moderate payout ratio, a manageable interest coverage ratio, a decent dividend yield, and a number of years proving they have a penchant for maintaining a good dividend growth rate have one wonderful thing in common.

    The dividends from the shares you buy, when reinvested, buys more shares which also pay dividends...which buys more shares...which pays more dividends that buy more shares...and the company bumps its dividend up every year.

    Using the rule of 72, if a company starts out with a 3% dividend yield and boosts its dividend by 9% each year, in 8 years, your dividend yield on cost will be 6%. That isn't even counting the additional compounding from reinvesting the dividends. That's just the dividend payout itself...even if you just cashed the dividend checks instead of reinvesting them.

    Shooting for capital gains is more unpredictable. There is almost no predictable element and you might buy shares in a company you think are undervalued and wait a long time for the rest of the herd to think so too.

    When you're holding shares waiting for the herd to bid them up in price, 2 or 3 years of stagnant or falling prices can be frustrating.

    As a long-term dividend investor watching the fundamentals, as long as the company's ability to maintain that dividend isn't threatened and its economic moat remains, it's a different story. It's the story of reinvested dividends buying more shares during the periods the price is depressed.

    It's the story of watching your dividend income grow faster. Being able to be excited about your investment whether the market goes up or down.

    It makes investing fun ALL the time, and the bonus is you usually beat the pants off the people trying to find stocks they think will double in the next year or two.

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