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.
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.
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.