Every Friday, investors across
this great land huddle together in the great electronic
village to celebrate a sacred primitive ritual.
Anthropologists and economists are divided as to the
motivation for this tribal rite. Many simply credit
ignorance and superstition. Some attribute the gathering to
man's eternal search for a deeper meaning - to know the
unknowable or divine the intent of the gods. Whatever the
reason, the ritual has assumed importance to the
participants and viewers far beyond any actual value.
The ceremony, almost as old
as television itself, proceeds in strictly defined order.
The high priest, resplendent in imported hand-tailored
Italian robes, gives a short invocation. The invocation
always ends with the introduction of a visiting priest who
has journeyed from the village of lower Manhattan to pay his
respects to the great one. The two then engage in a highly
ritualized duet ending with the high priest clutching and
choking the visitor while chanting "names, please" and "what
do you like?" When the visitor has disgorged enough names he
is temporarily released.
The high priest then turns
his attention to a panel of elders and lesser priests. At
least one lesser priest must always dress as a bull while
another poses as a bear. Each makes appropriate noises for
his role and offers his reading of the entrails. (Under an
agreement with the Society for the Prevention of Cruelty to
Animals, no animals are actually sacrificed on camera.)
While the lesser priests never agree on the portents, they
are not allowed to actually physically attack each other,
this being considered bad form.
The remaining priests all
fill familiar roles. One must mutter and fret about market
volatility while another advises the faithful to buy where
their wives shop. Yet another endlessly intones, "Don't
fight the Fed, don't fight the tape." The high priest gives
each his blessing equally, bestowing a knowing smirk upon
every remark, no matter how inane.
The high priest maintains a
private collection of pet elves, which on a weekly basis
attempt to divine the will of the gods and share their
rapturous insight through a "sentiment poll." The gods must
be crazy, or at least fickle, because the result has become
a contrarian's delight. So poorly have the elves interpreted
the omens that several years ago the high priest had them
all slaughtered in a fit of pique. He then replaced them
with new and improved elves. Unfortunately, the new elves
have become an even sorrier lot and must be severely
concerned with their own fate.
Still smirking - after all,
nobody is catching on, everybody is eating it up, and he is
actually still getting paid for this nonsense - the high
priest offers a final benediction. After the benediction, a
very minor priestess magically appears, silent as Vanna
White, and leads the group into a spotlight where they all
pretend to chat as the light flickers and fades from the
television. A soothing voice offers to send transcripts of
the sermon to the faithful.
As the light dies across the
global village, each member of the congregation finishes his
communion martini and begins to meditate. Under the spell of
this powerful, mind-altering drug, each becomes convinced
that the gods have transmitted a unique and startling
insight to him alone. Armed with this sacred "insiders"
knowledge, the villager expects to trade invincibly on the
following Monday, extracting economic rents from the
We have seen the dismal results
that American investors endure. While we know that the
economic and human consequences are severe, we also know
that reasonably simple tools and techniques are available to
dramatically improve investors' returns over time. We know
that the average investor is intelligent and successful in
most other aspects of his personal and professional life.
Though few investors are intent on self-destruction, they
often behave as if they were. This is a very disturbing
paradox. What in the world is going on here? Why haven't
investors caught on? Why don't they get it?
If you have been wondering
why the average investor hasn't got a clue as to how to meet
his financial objectives, Wall Street Week may
provide some interesting insight. Funded by Public
Television (which should set higher standards!) and under
the guise of sophisticated commentary, Wall Street Week
is just about everything that can be wrong with the popular
The show is not only several
magnitudes worse than a total waste of time, it is very
dangerous to your financial health. The Surgeon General
should require a label similar to the one on cigarette
packages and advertising warning that "Exposure to this
drivel has been shown to cause self-destructive behavior,
loss of cognitive power, and serious depletion of financial
Wall Street Week, and
similar shows, begin with the assumption that "insiders" can
explain and predict market behavior. Further, it assumes
that these insiders would generously share their knowledge
with a hundred million of their closest friends.
We know that everybody is
entitled to his own prediction. Mine, yours, and your dog's
all have an equal chance of coming true. But I am going to
tell you a little secret. If I absolutely knew what the
market was going to do next week, next month, or next year,
I wouldn't share it with you. Instead, I would go out and
mortgage my house to buy options and then sail away. You
would never hear from me again. I wouldn't even finish this
book. I'd be history!
It's nuts to believe that
these guys have any idea what the market is going to do, and
even more crazy to think that they would share it if they
did. The show does give them a stage for shameless
self-promotion, and a big ego boost. An appearance on
Wall Street Week is the ultimate public relations coup
for a fund manager.
The popularity of the show
can certainly not be based on the accuracy of its
predictions, which have been a dismal failure. There is
really an undeniable entertainment value to schmoozing and
kibitzing with movers and shakers. This is the Wall Street
equivalent of Lifestyles of the Rich and Famous. The
real problem is that people take it seriously. If you think
that watching Wall Street Week is a shortcut to
forming an investment philosophy or modeling an efficient
portfolio, you are unlikely to be tempted to delve into a
tedious and challenging study of finance.
The show dedicates itself to
the highly questionable (even suspect) proposition that
market timing and individual stock selection drive
investment performance. Today, almost nobody on Wall Street
with an IQ over room temperature really believes that, yet
this proposition is still shamelessly peddled to anybody who
is still buying.
In show business, of course,
there is never a reason to abandon a proven formula. As long
as ratings and market share stay up, you can count on next
week's show looking remarkably like last week's.
Notwithstanding its public funding and high-sounding
purpose, PBS is just as interested in ratings as any other
enterprise. Wall Street Week is a hit, so PBS isn't
likely to screw it up with a dull and boring discussion
about how markets work. Success in terms of ratings and
market share are not related to the value or validity of the
investment information and content.
So, Wall Street Week
studiously avoids any discussion of the last forty years of
academic research, pretends that markets are hopelessly
inefficient, bans discussion of Modern Portfolio Theory and
banishes heretics who promote buy and hold. Unfortunately,
the popularity and longevity of the show give the impression
that it must be doing something right. This success
continuously validates a brain-dead investment philosophy.
The net result is a Public Broadcasting (dis)Service.
If Wall Street Week were
an isolated phenomena, no one need be concerned. America is,
after all, notoriously tolerant of crackpots. But an
examination of the rest of the popular financial media turns
up little else of value, little intelligent life at all. In
fact, most of what the popular financial media puts out
could properly be called financial pornography! It's not
only bad for your wealth, it has no redeeming social value.
We must be clear about what
the media are up to. It would be a mistake to believe that
they are on a collective mission to educate the American
public. Rather, their mission is to sell papers, airtime, or
magazines. Any educational value that might result is just a
happy coincidence. Anyone who has ever watched television,
listened to talk radio, or browsed the newsstand at the
check-out counter might reasonably conclude that the media
have a very low opinion of the American intellect.
Their general credo is that
"No one ever went broke by underestimating the American
public." Contrary to popular belief, Lowest Common
Denominator is not a mathematical term, but a programming
director's working philosophy - give 'em what they want,
don't make them think, dumb it up as much as possible, and
stick to winning formulas.
The media have another
problem too: the relentless pressure to come up with new
stories every day, every week, or every month. When I finish
this book I can just stop writing, but such is not the case
at Money Magazine. Next week they have a whole new
magazine to fill. While there is a limited number of good
ideas to explore, there is an unlimited demand to fill air
time or column inches.
The media solve this problem
by carefully selecting the themes they wish to cover. For
instance, Modern Portfolio Theory (MPT) is considered too
complicated for the great unwashed American public to
follow. Not only is it sort of dull, it has a limited number
of things that can be said about it and it lacks a human
interest angle. All in all, it's not a subject likely to
sell a lot of airtime. Worse yet for radio or television, it
takes a little thought and can't be reduced to twenty-second
sound bites. It shouldn't surprise you that the airwaves
aren't full of stories about MPT.
On the other hand, because
there is a new market closing every business day, there is
an unlimited number of guys that would just love to go on
television or radio to give their slant on why the market
did what it did. These sources, often standing with the
trading floor or even a ticker tape in the background to add
color, spew catchy sound bites provided by their public
relations departments. It doesn't matter whether the source
is right or wrong, or even has a clue what's going on. It
fills time and gives the impression of juicy tidbits and
maybe even insider knowledge.
And not just any bland
comment will do. Imagine if you will a source who made the
following comment, "Who knows why the market went down
today? Markets do that every once in a while. It's really
not important to long-term investors. Investors should buy a
properly balanced diversified portfolio and forget about
it." How many times do you think that man will be invited
back? Where is the excitement? Where is the pizzazz?
Every business day the
government announces a few new economic numbers. Often these
are just revisions of previously announced numbers. Each
number, however, is treated gravely, as if the entire future
of capitalism depended on it. Each demands minute analysis
and generates the required sound bites by a highly-regarded
(by whom?) source. Since no report can be considered
complete without speculation, it would be unthinkable to
simply report the number without an "expert" who could also
provide the appropriate spin.
Hero worship is a favorite
media subject. Interviewing a "successful" mutual-fund
manager has all the ingredients the media loves: human
interest, insider tidbits, deep insights, and pithy quotes.
Unfortunately, we are going to need quite a number of heroes
to fill all that time or space. If we confine ourselves to
managers who have "beaten" the market for over ten years, we
have pitifully few.
But, if we lower our time
horizon to ninety days, the number of potential candidates
expands enormously. Each will be hand-delivered in a new
Italian pinstripe suit, starched shirt, and power tie with
properly blow-dried hair by a suitably humble
public-relations flunky. They all know the rules: pithy
quotes, deep insights, groundless speculation, and insider
knowledge, or you don't come back.
Few decline to play by the
rules. An interview on television or radio, a comment in the
Wall Street Journal, or a picture on the cover of
Money Magazine, Forbes, Fortune, or
validates the "expert" as a real player in the business.
Phones begin to ring and cash begins to flow in her
direction. Careers can be made in just a few seconds. So,
now is not the time to be humble. Of course, we know which
way the market is going next quarter, and you can be sure
our shareholders will benefit greatly. Our research (our
proprietary indicators) shows that.... This market has no
where to go but....
One of the dirty little
secrets of the news industry is that most reporters don't
think up their own stories. Instead, they are fed a constant
stream of ideas and stories by the public relations flacks.
All reporters and writers are showered with press releases,
backgrounders, briefings, and BS by public-relations agents
hired to make their clients rich, famous, and powerful. A
lazy reporter can just change a few sentences in the
information provided him by the public-relations agent and
then hit the bar with his day's work done.
The public-relations industry
isn't exactly a repository of virtue. Their mission isn't
truth, it's spin. Their interest is in getting their
client's story out into the media, with enough media
coverage able to validate almost any loony idea. For a
price, they will tell you that tobacco is good for you,
citing plenty of "evidence" and "research" produced in North
Carolina colleges located in little towns with names like
Raleigh and Winston-Salem. Though the media and the
public-relations folks generally have a well-deserved low
opinion of each other, their relationship is symbiotic.
Neither one could survive long without the other.
You have got to have money to
afford a public relations campaign. That kind of talent
doesn't come cheap. Think for a moment about who has the
deep pockets on Wall Street. What kind of behavior do you
think the brokerages want to encourage? Are they the
organizations that will profit from low cost, low turnover,
buy and hold strategies? Is their interest necessarily the
same as yours? Do you think that maybe you are being had?
For a variety of reasons, bad
advice is far more profitable than good advice. Take a look
at who pays for advertising on television, radio, magazines,
and newspapers. You don't really expect the media to
savagely maul the hand that feeds them, do you?
Not all reporters are rocket
scientists. It's perfectly possible to be a financial
reporter without ever having taken a course in finance or
economics. It's perfectly possible to be successful in the
trade without having read a book on the subject within the
last ten years. Financial theory has evolved rapidly in the
last few years and many reporters haven't done their
homework. Then again, they don't need to; it's too easy to
interview heroes and put a little spin on yesterday's market
close or tomorrow's number of the century. Today's reporters
just need to follow the formula.
Of course, the really bright
reporters quickly find that financial theory isn't newsy.
There are lots of reporters out there who could teach
college-level courses in finance. But they are trapped into
covering the same old stories the same old way. That's what
the people want, expect, and pay for. That's not only what
sells, it's what advertisers pay for. In an atmosphere like
this, is it any wonder that Luis Rukheyser is a household
name while Harry Markowitz, Merton Miller, and Bill Sharpe
Sloppy reporting and fuzzy
thinking aren't just the province of a few small-town rags.
I thank Weston Wellington of Dimensional Fund Advisors for
sharing a few gems from his immense collection of Financial
Pornography. Here is an assortment of thoughtful and useful
offerings from some of the best known papers in the country.
Each of you could put
together your own outrageous collection from tomorrow's
papers. If millions of people didn't take this garbage
seriously, it would be funny. Unfortunately, the continuous
rain of dreck from television, newspapers, magazines, and
radio creates a climate where investors get the impression
that this is how smart players ought to plan their strategy.
It's hard to ignore the most highly visible "prestige"
players in the media. They must know something, right?
These kings have no clothes!
There is a whole industry of hacks out there that get paid
very well for filling your head with merde! Investors have
got to realize that this type of commentary is worth far
less than zero! You and I aren't going to reform the media,
nor do we have to go on that mission. They have their
program and we have ours. Their program is to sell
advertising, ours is to learn something. While we don't have
to buy into their agenda, we do have to understand it.
The Big Lie
One of the earliest and most
successful (for a while) spin doctors was credited with the
idea that if you tell a big lie often enough, people will
begin to believe it. The financial advertising folks have
taken that interesting concept one brilliant step further.
By taking a number of absolutely true facts and mixing them
with a little innuendo, they have been able to create big
We don't expect advertising
to be fair, objective, or impartial. In that regard
advertising seldom disappoints us. While the Securities and
Exchange Commission complicates the lives of financial
advertisers by requiring documentation and fair disclosure,
advertisers have found that they can live with this while
still conveying a distorted message. You will be
hard-pressed to find one outright lie. While each fact has
been extensively researched and verified, it is the emphasis
and spin that manages to pass on an absurd image.
For instance, suppose you
advertise yourself as having the highest total return since
the crash of 1987. That sounds pretty good, right? You tout
your Morningstar rating and paint yourselves as the toughest
managers on Wall Street, as if managers should somehow carry
Uzis and have black belts to be effective. (Or, maybe they
are just nasty to their office staff. Who knows?)
The ad carries a strong
implication that this single fund is probably right for all
investors. A viewer could even be forgiven if he began to
think that it might be right for his entire portfolio. After
all, what a great track record! They couldn't lie on
television, could they?
But, you might fail to
mention that your fund got hit harder than just about any
other fund during that same crash. Or you might forget to
say that you invest in stocks of very small companies, which
carry the highest risk in the stock market. Or lastly, you
might fail to reveal that your expense ratio is one of the
highest in the industry.
I must admit, I don't know
how tough the managers really are, but in all other respects
there is no sense quibbling with the facts that the ad
presents. I also will tell you that I think the fund is
pretty good for what it is. These guys buy little companies!
They get down in the weeds where few other managers will go.
Given the very small companies that the fund buys, and given
the lack of liquidity in that part of the market, we would
expect that the fund returns would be pretty good. We would
also expect the risk to be very high, which it is. So, while
this might be a good choice for two or three percent of a
portfolio, a little part of your domestic, small-company,
growth allocation, it hardly qualifies as an all-weather
I'm not sure that what the ad
conveys is everything that an investor should know before he
signs up or sends money. The facts are all right, but the
message is distorted. So, it must be a great ad! I am not
going to burden you with a few hundred other examples culled
from a typical day's media. But by now you should be asking
yourself if you would buy a used stock from these guys!
Of course, there is a very
direct link between advertising and new money flowing into
the funds or brokerage houses. If advertising didn't
generate a positive cash flow for the funds, you might
correctly expect that they would shortly give it up.
Frequent advertising gives the impression of dependability
By now you should suspect
that there is no link between an advertising budget and
future performance. To the extent that advertising expenses
appear in the fund's expense ratio, they add a drag to
performance. To the extent that existing shareholders get to
pay an expense designed to attract other investors you might
consider it a tax.
There does appear to be a
strong link between past performance and advertising. A
large fund family always is going to have a few winners.
Strangely enough, these tend to get the lion's share of the
advertising budget. The impression they would like you to
give is that the fund family has only winners. Of course you
may care to dwell for a moment on how infrequently these
winners repeat. But that's not likely to be emphasized in
Usually you will see in tiny
little print somewhere hidden among the charts the required
SEC disclaimer, "Past performance is no guarantee of future
performance." That is the only thing you should ever
believe! As they love to say on Wall Street, "You can take
that to the bank!"
The seeds of all this
confusion and disinformation from the media and advertisers
fall on fertile soil since our minds are already conditioned
to believe it. Earlier we explored the tremendous impact
that conventional wisdom has on our lives. When we grow up
"knowing" something, it's a great deal harder to accept
change than if we were starting from ground zero.
Finance is a science or art
undergoing rapid change. Most of us with finance or
economics degrees minted before 1990 have a lot to unlearn.
While we were going about our daily lives, they changed the
whole game on us! Our natural inclination is to want to play
by the old rules. And you can rest assured that Wall Street
wants to continue doing business as usual.
Finance, investments, and
economics are not required by American high schools or
colleges. Somehow, like sex education, it is assumed that we
will pick the subject up naturally. Even new graduates may
never have been exposed to concepts that they will need in
order to vote intelligently on economic policy or provide
for their family's futures.
Given the importance of the
subject to both the political process and to the individual,
I have always found this a curious, costly, and
disconcerting policy. Millions of Americans think that they
know a great deal more about the subject than they actually
do and go through their entire financial lives blithely
acting on that assumption.
What's missing here is any
concern or concerted effort to get us back up to speed. A
whole generation of Americans is poised to retire without
nearly sufficient assets to support them and no one seems at
all worried. While there is some agreement on the need to
invest more, there is very little effort aimed at helping
Americans to invest more effectively. The entire subject has
been treated with benign neglect.
The fault lies not with the
schools. Educators are willing and able to teach whatever
Americans want. But a political determination must come
before the school system can devote its scarce resources to
any project. This is not a decision that individual teachers
or school systems can make for themselves. Until the
American people demand a better fundamental economic and
financial curriculum, it's not going to happen. And until
they do, Americans will be shortchanging themselves in an
area critically important to their success.
There is an antidote to all
this BS. Get to your local university or college and take a
course in finance. Go to your library and borrow some
current books on the subject. Subscribe to the Journal of
Finance. Download a few papers from the economics and
finance departments of the world's major universities. Tear
yourself away from the television and get yourself down to
the local Barnes and Noble, Waldens, or Borders bookstores.
You are going to have to take
responsibility for your own financial education. If you
think you are going to get any useful information from Wall
Street Week, Money Magazine, or The Wall Street Journal --
or the ads appearing in them -- that will help you build and
administer a superior portfolio to meet your long-term
goals, there is little hope for you.