Pay close attention to what’s motivating market commentary
Washington Post, May 4, 2014
Have you ever heard a talking head or commentator say something and immediately wonder, “Why did he say that?” I don’t mean the Donald Sterling kind of stupidity, but rather, specific comments on the economy or the markets or individual stocks.
The short answer is that a bias is influencing their commentary. The longer answer is the subject of today’s column.
I want to follow up on one of the first Washington Post columns I wrote, about the many roles good investors play. We observed that investors need to be equal parts historian, mathematician, psychiatrist, accountant and trial lawyer.
Today, let’s focus on that last role. If you consume lots of stock research or market commentary — or much of anything from the financial media — then you will find this exercise especially important. Let’s look at the motivations of various pundits, strategists and fund managers. Suit up in your finest barrister gear; we are going to play “cross-examining litigator” for fun and profit.
Let’s start with our previous observation:
“Good litigators are always skeptical, but not negative. Is that witness telling the truth? What is motivating him? Is the opposing counsel’s argument logical? Being able to answer these questions makes for a good lawyer — and a good investor. . . . When it comes to investing, everyone is trying to separate you from your money. Good investing requires good judgment. Being able to recognize valuable intel versus the usual blather is a huge advantage.”
Pundits and analysts often say things about investing that may not be what they appear to be. Scratch the surface, and you discover that not everyone shares our interest in relentlessly pursuing the truth.
In both civil and criminal proceedings, the key witnesses’ motivations will be questioned. Looking at their reasons for saying something can often shed light on their position. Why did they say that? What incentives might they have? What are they subconsciously rationalizing?
To quote Jeff Saut, chief strategist at Raymond James (which manages more than $400 billion), “Where you stand is a function of where you sit.” I have always taken that to mean in the investing world that your outlook is driven by your job responsibilities. Consider the following people’s incentives and biases:
● Bulls and bears: The simplest breakdown of market participants: Buyers and sellers, positive and negative, yin and yang. Any time you speak to people about their posture, you learn about their most recent investment activity. When someone just bought stocks, they tend to be bullish; someone who just sold is bearish.
You might imagine it is the opposite: Anyone who is bullish has got to be a buyer. That is not how the human ego works. What that person just did sets off a cascade of rationalizations, self-doubt and worry. His positions dramatically affect his outlook, not vice-versa. He wants to be right, smart, successful, wealthy. Hence, the wishful thinking begins as soon as the trade is executed.
● Analysts and strategists want three things: recognition, trades and deals. Thus, please follow my stock and/or market calls. Also, could you send some trades to my desk, and consider us for your next syndicate or banking deal? We gotta pay the bills around here!
● Mutual fund managers want your money in their funds. They get paid based on assets under management. More money equals, well, more money. Whenever they are on TV, they are pushing a holding they already bought in the hopes you will buy it, too (and maybe send its price higher). Their stock picking and/or market timing skills are superior to a simple and cheap index funds — therefore, you should give them your cash, they say. (And just ignore all of the academic research on this.)
● Hedge fund managers charge so much more than mutual fund managers; alpha is even harder to come by. They end up selling a variety of things beyond mere outperformance. Behavioral finance professor Meir Statman observes that “investments express parts of our identity.” Savvy fund marketers know this, and thus they sell access to managers, along with status, prestige and astuteness. For the vast majority of hedge funds, they are not selling alpha, i.e., outperformance versus the benchmark.
● The end-of-the-worlders: Since the rally began in 2009, we have seen the usual crowd of Web sites, newsletter writers and pundits forecasting a terrible crisis that you simply must note: The Fed has run amok. We are running out of food. Fiat currency is soon to be worthless.
They seek to take advantage of your tendency to succumb to the recency effect, where you place excess value on what just happened. After the financial crisis, your natural tendency is to look for another one, and they have just the newsletter to help you with that. Let me remind you that the end of the world bet has yet to pay off, and when it finally does, whom are you going to collect from?
● The crash groupies: It’s coming! Another crash is just days away! My favorite is the pundit who each year forecasts an “imminent 1987-like crash.” Perhaps he should change that to “eventual,” because it has been imminent for three years.
The crash groupies always have some new and esoteric signal with an ominous sounding name: the Hindenburg Omen, the Death Cross, Peak Earnings. While they get points for creativity, what actually motivates them is capturing the spotlight by making the big call. Whether they lose you money for years while waiting to randomly catch a market top seems to not bother them much.
● Chief executives want lots of things (besides being well compensated): They want you to buy their products and own their stock, and if you could deregulate their industry, that would be greatly appreciated, too. Whenever they speak in public, they are pursuing one of these three goals.
● Gold bugs have a narrative, which they pursue regardless of new data. My favorite oft-forgotten factoid is that the SPDR Gold Shares ETF (GLD) was the brainchild of the World Gold Council. WGC was created by global mining companies for the sole purpose of promoting the sale of gold. The GLD ETF came about after “two decades of depressed prices and a growing glut of the yellow metal.” As we discussed here, GLD was a bit of a Hail Mary to find a way to deal with price and inventory pressures. (Mission accomplished).
Imagine a Venn diagram showing a cross-section of gold bugs and doomers, and you end up with the “physical gold” crowd. They insist: “The whole system is going to collapse, you cannot even own the ETF — you must own physical gold!” And they are happy to sell some to you.
● TV producers want ratings and are willing to do nearly anything to get them. They gin up artificial conflicts and create an urgency for even the most minor of economic data points. Focus on the stock you must own NOW! You might not believe this, but what you see on financial TV might not be motivated by what’s best for your 401(k).
There are lots of other commentators in the market who want your time, attention and money. Newsletter writers want your subscription dollars. Journalists want you to read their work (and to retweet it, please). Regulators want their budgets maintained or even raised. Politicians want to be reelected.
These various biases, incentives and even subconscious desires affect the pronunciations of anyone who talks about equities. Investors need to occasionally act like the cross-examining attorney challenging the witness on the stand. Revisit the obvious, look at the data, question assumptions and consider alternative explanations for what you read and hear.
When it is your money on the line, you cannot simply accept as true or reject as false everything you hear. Being able to identify what is valuable and reject that which is not is a critical skill for investors.
Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @ritholtz.
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