Do Internet and Media Resources Help the Individual Investor?

Regular readers of "A Dash" know that it is a blog about a book.  The audience for the book is the intelligent individual investor, perhaps unhappy with his or her current financial advisor.  There is always a market for this, since there will always be some financial advisors who are trailing the market in their performance. 

The ads from the online brokerages will cite this evidence and appeal to the intelligent investor. Encouraged by advertisements in print media and on television, the investor decides that he can do better.  He already reads business columns and watches some business programs.  He is conversant with the major financial issues of the day.  He probably reads some of the major slick magazines.

Now it is time to turn to more powerful methods:  Internet data sources, financial blogs, trading shows on CNBC, and maybe even the ultimate — designing his own trading system.

The Crux of Our Purpose

From comments and emails we know that the audience for "A Dash" consists of some of the people we hope to reach with our book and also some of the best financial consultants.  Our readership is not the large cult following of big-time blogs, but that is fine.  We are not trying to monetize traffic as we write the book, one page at a time.  We do hope that those who understand our cause will continue to comment and write emails.

Our Main Themes

We will elaborate on the themes in greater detail, but there are a few that we have emphasized, including the following:

  • Individual investors face significant obstacles. In trading their own accounts  they consistently under perform the major averages.  Mostly this comes from chasing performance from the prior year, poor market timing (mostly selling bottoms), investing based upon questionable macro theories, and trying for homerun stocks. Most do not realize these issues.
  • Expertise matters. Most major market issues involve
         multi-disciplinary questions.  The astute investor must determine which sources are authoritative on each part of a question and assemble the knowledge to make a decision.
  • Valuation matters.  Valuation questions relate to the overall market, and also to the selection of particular stocks and sectors.  Anyone trading without regard to valuation is at a disadvantage.

Internet Democracy

The greatest powers of the Internet include more widespread access to information, more diversity, and more rapid access to breaking news.  The strength of the Internet has also pushed mainstream media.  CNBC is faster to break stories.  The major print media sources have added blogs to provide a quick response.  Major websites provide breaking news, commentary, and online trading journals.  In a general sense, more information is good.  On a theoretical basis it should make markets more efficient.

The greatest advantages are also the greatest challenges.  Making use of this information requires special skills.

The Democratizing Effect

When information is presented to the consumer, it requires interpretation.  Most of those watching CNBC or reading a blog take the sources at face value.  There is real danger here.

The big fund managers are not making their decisions by reading blogs or watching CNBC.  The Fed policymakers are  not  watching either.

So how do these sources of information integrate with reality, and what advantage can one gain by following them?

The challenge is to identify information that conveys an advantage.

An Example

CNBC is a major source of the leveling of presenters.  The network has decided that any issue should have a variety of viewpoints, and they reach out to find candidates to make a good show.  The problem with this format is that it confers advantage upon those who are comfortable, facile, and fluent in the TV environment.  The impact on the viewer may convey a false impression.

There was an outstanding example of this in today’s programming.    CNBC did an analysis of the housing market and the economy including three guests, Alan Blinder, Nigel Gault, and Diana Olick.  Thoughtful readers should watch the segment to appreciate our point.

Our informal office panel felt that Olick was the most persuasive by far.  She talked about the housing sector from the perspective of the homeowner in trouble and discussed impacts on home improvement.  She was articulate and poised.  The problem is that she is not an economist.  Olick is a terrific journalist who has worked her way up from small assignments, to larger assignments, to big-time news show spots, and finally to her own show on CNBC.  She is very good at what she does.  This often means taking a major story and personalizing it so that the average viewer can understand.  It is very persuasive.  Her way of making the market seem to be the problem of a single homeowner is likely to resonate with viewers — also potential investors.

Alan Blinder has been an econ professor at Princeton for 36 years.  He has taken leave to serve on the Council of Economic Advisors, and as Vice-Chairman of the Fed.

Nigel Gault is a Wall Street economist educated first at Cambridge and then getting a Harvard PhD.


The nature of the interview left a "he said, she said" impression.  If one had only listened to the two economists, especially Blinder, the impression would be quite different.

Social scientists in general and economists in particular do not think of behavior as the actions of one specific individual.  Constructing stereotypes for behavior is easy to do and easy to understand.  It is also very misleading.

Diana Olick describes what she sees as "typical behavior."  In our neighborhood we have seen a very different story in the following in the last few days:

  • Furniture vans unloading major purchases.
  • Home additions  under construction.
  • New stone patios and landscaping going in.
  • Complete tear downs and new construction in somewhat older adjacent areas.

Homeowner behavior is a distribution, not a unique point.  Those who do not understand economics try to "dumb down" the argument.

The more they succeed, the more they mislead.

You may also like


  • Bill aka NO DooDahs! August 28, 2007  

    Comments in chronological order of the points they address.
    IMO the approach taken is more important than qualifications of the analyst, as those with both qualifications and flawed approaches are legion. Expertise matters, but one should be careful of the metrics one uses to measure expertise.
    For the effect on sheeple, er, well, yes, sheeple, emotional content and plays to inductive thinking are far more effective than structured analytical approaches. This effect is magnified in mass media presentations like a television debate segment. Give a hypothetical Diana Olick or any of her ilk 30-60 minutes of preparation and she will “clean the clocks” of the experts who present data in the way that experts like to see data presented. Analytical thinking is not a skill held by the population at large.
    Stereotypes make an interesting discussion. In the vernacular, a stereotype is constructed from inductive observation of a large sample size, and is representative of a modal behavior, or perhaps the behavior of a plurality or majority of the group the sample is chosen from. As such, stereotypes constructed this way are perfectly appropriate for discussion when dealing with large samples, but fail when dealing with small samples or with individuals. I think the point you may be driving at is that the “Olicks” of the world are attempting to improperly construct a stereotype from an insufficient sample size.
    Taken more literally, this is a misuse of inductive reasoning, drawing conclusions from a sample size that is either non-random, too small to be significant, or otherwise biased, and then applying those improper conclusions deductively to other groups.
    The major arguments I have rec’d from the housing bears boil down to two points: (1) look at these specific egregious examples! and (2) look at this flawed biased data!
    (1) is self-evident, anyone pointing to anecdotes rather than distributions or histograms of impacts is missing the boat.
    (2) is harder to spot.
    When folks like “Mess that Greeny Made” start drawing conclusions based on the S&P C-S 10-market composite, one needs to point out that those 10 metro areas are not necessarily an unbiased estimate of the entire U.S. housing stock.
    The median price of units that sold last month is also not an unbiased estimate of the entire U.S. housing stock. There is quite possibly a different distribution of units offered (desired) than of units in existence.
    Anyone with the chutzpah to attack the statistical significance of numbers he doesn’t like and don’t support his agenda should apply the same criterion to the numbers he DOES like, or that support his agenda.

  • Josh Stern August 29, 2007  

    I’m not a CNBC watcher so I’ve got no opinion about what Dianna Olick normally says or her style. But I watched the linked video clip and don’t really see what you are driving at. In my mind all three interviewees said reasonable things about housing and didn’t directly contradict each other at the level of details. Olick’s point that a lot more ARM resetting is ahead of us than behind us is simply true, and I’d be shocked if there are not economists out there who are worried about that. When the other two guys say we are probably closer to the trough than the peak in housing prices, it’s not clear whether that view is based on some well validated model or is just their hunch (economist’s make personal guesses too).
    There shouldn’t have been any new info in what any of them said for someone who follows the U.S. economy and the stock market. One thing I would like to see and have not is where the interest payments from those ARM’s are currently accounted for. How much is in future earnings estimates for banks? How much has been borrowed against by hedge funds? If the future payment stream from those mortgages actually stayed kind of constant (because of a mixture of deliquent and non-deliquent loans), which business entities would fall the most from their present value? It occurs to me that pessimists may be right about the probable quantity of defaults but still be double or triple counting the economic shortfalls that result. Can both the banks and the consumers be left with less money because of this? Only to the extent that the lenders have already spent the money.

  • Josh Stern August 29, 2007  

    Following up, here’s Bob Shiller (Economist from Yale) mentioning how home prices went down for 5 years straight between ’89 and ’94:

  • Bill aka NO DooDahs! August 29, 2007  

    Check out this story, which makes one wonder how many sub-prime foreclosures are related to out-and-out fraud, and I really doubt that those foreclosures, in particular, will impact consumer spending! LOL. This one fraud ring accounts for over 100 subprime foreclosures …

  • Bill aka NO DooDahs! August 29, 2007  

    In relation to BS from Yale on home prices going down for 5 years straight, no such even happened as measured by the price index, unless he is talking about a local event.
    If BS from Yale is talking about the S&P CS index, , then he is certainly not talking about a national event, as that index is comprised of 10 (or in the broader index, 20) cities, and is FAR from nationwide.

  • Josh Stern August 29, 2007  

    Bill, I didn’t find data covering the period 1989 to 1994 at those links. Did I miss it somewhere?
    This link has some graphs of various housing related indicators that show multi-year slumps from time to time:,b2530qgh

  • RB August 29, 2007  

    While Olick certainly has better TV presence, she left a less-sanguine impression because of her statement about uncertainty due to the mortgage resets. I thought I noticed Blinder nodding in response as the clip closed. With regards to the housing market, blogger bulls don’t seem to have a good record to date.

  • Bill aka NO DooDahs! August 29, 2007  

    – on the OFHEO link, click in the top section under “THE LATEST ..,” the “Census Divisions and US” link. Under “select regions to compare” select the United States as one of the three dropdown boxes and hit “search.” The resulting table displays annual changes in the US HPI from 1975 to present, as calculated quarterly by the OFHEO using the Case-Shiller methodology, applied to all home transactions in the United States that Fannie and Freddie have data on.
    There are no negative years on record with this index. There are some that are pretty close to zero, though.
    The S&P C-S index uses either 10 cities, or in the broad index, 20 cities, instead of nationwide data. This explains a great deal of the discrepancy, esp. as Boston is one of those cities. It is arguable whether the data that the S&P uses is more complete for those 10 (20) cities than the OFHEO data is, because “jumbo” loans probably aren’t in the OFHEO data, but the S&P data is GEOGRAPHICALLY incomplete. If you browse around their site, you’ll eventually see a link to download an Excel spreadsheet with the S&P data to 1987.
    In downloading that spreadsheet, which has monthly, and not quarterly, data, the Aug 1990 to Mar 1994 period shows almost exclusively negative annual appreciation. However, that is for the 10-city index, as they did not start using the 20-city index until Jan 2001. Ten cities does not a nation make. As mentioned previously, Boston is one of those 10, and Boston had local issues at the time making a huge slump. However, the OFHEO data does not show that Boston pulled the U.S. down. Also, three California cities, especially LA, had a slump, but even in the S&P city data, it shows Atlanta, Denver, Miami, Chicago, Cleveland, Portland, and Seattle as being strong in price appreciation. Were all of those in the 10-city index at that time? No. All three California cities and Boston were in, some of the others were, too, but Atlanta, Cleveland, Portland, and Seattle are not. The S&P data is biased by its sample selection, which does not reflect the nation on average.
    When you are looking at data that purports to be nationwide, check to see if it is, and what the sources are. Neither of these sources is perfect, the OFHEO data is “only” Fannie and Freddie, but I would consider it far more comprehensive than the S&P data, which is limited geographically and is not certain to be more comprehensive than the OFHEO in its target areas, as I haven’t pinned down their data source.
    Re: the ING link you provided, do you have a *specific* link to a graph they provide that claims to be (1) nationwide, (2) home price appreciation (not starts or changes in houses under construction), and (3) showing a multi-year decline in home price appreciation? If so, I would like to see that and compare it to the other data sources …

  • Josh Stern August 29, 2007  

    Thanks Bill, I found it and also this link which explains the differences in the indices:
    To summarize the most important points, it seems that OFHEO has more geographic coverage (good) but doesn’t include many high-end, non-conforming, homes (bad) and doesn’t weight the index by actual market prices (probably bad).

  • August 29, 2007  

    Lets All Move To Jeffs Neighborhood

    Jeff over at A Dash of Insight has written another excellent article, this one entitled Do Internet and Media Resources Help the Individual Investor? However, he makes a couple of points which themselves reveal a bit of bias, and I&#8217…

  • Jeff Miller August 30, 2007  

    Thanks to everyone for the great comments. While we all want to weigh the substance of these arguments, my educational focus is a bit different. I am reminded of Ronald Reagan in Presidential debates, where he always seemed to know the most persuasive thing to say.
    I am pondering a theme about journalists, who do great work when drawing out expert opinion. Is there a line? What happens when the journalist is thrust into the role of expert. Does the journalist offer his or her own views, or distill knowledge from others?
    Email from readers tells me that they appreciated the thoughtful comments.

  • VennData September 2, 2007  

    The housing bulls were right for a very long time, until they were wrong.
    Now we’re seeing calls for rate cuts from the housing/market bulls, the bonus-motivated Wall Street touts, the Larry Kudlows of the right-leaning media, and even the conservative economist M. Feldstein.
    With so much riding on this recovery for them to say it ‘proves’ Bush’s tax cuts ‘worked,’ a drop off in general output would not be good.
    Which gets to the point that many of these economists do have a bias AND… the future government action – or inaction – may have a huge impact. on housing No one even pretends to claim to know what Bush and Congress will come up with. So thoughtful economists looking at data and doing regressions may or may not get their next call right.
    See Ayre’s book on quant models beating experts. time and time again.