How the Media Screws Retail Investors

Dear Retail Investor,

 It was August of 2011.

 I was watching CNBC, and the talking heads were gushing about how $2,000-an-ounce gold was a done deal.

 Some were even calling for the yellow metal to hit $5,000.

 The air was thick with fear at the time – everyone was afraid the US would default on the national debt.

 (Remember that? The so-called “debt-ceiling” crisis?)

 The smart money – Wall Street pundits were saying – was buying up gold, gold ETFs and gold mining companies with both hands.

 The implications were clear – you’d better get in on precious metals, too… while there was still time.

But the talking heads were wrong

Instead of gold blasting through $2,000…

 It plunged to just over $1,500 an ounce over the next nine months.

 A year later, it sank to $1,200.

 And in 2015 it nearly hit $1,000.

 The moral of the story? Ignore the so-called “experts” in the mainstream financial media.

 They’re wrong so often it’s laughable.

 Take Jim Cramer, who hosts CNBC’s wildly popular Mad Money.

 Back in 2000, he told his audience to buy a handful of tech stocks… right before the tech-heavy Nasdaq bubble burst.

Then in 2007, he said to buy bank stocks… right before the devastating crash of 2007-2008 that nearly ruined the world’s financial markets. 

 

And he told investors to sell Hewlett Packard back in November 2012… which doubled in price over the following six months.

Cramer’s far from the only example of bad media investment advice

Consider an August 30, 2016 article in Fortune called “6 Reasons You Should be Extra Worried About the Market Right Now.”

 The article, as its title suggests, warned about investing in stocks.

 The warnings included arguments that stock prices were too high…

 Interest rates were as low as they could go…

 Oil was poised to skyrocket… 

 Blah, blah blah.

 One year after this article came out?

 The S&P 500 index was up another 12%.

 By the end of June 2019 a few years later, it was up a little more than 35% from the time that article was published.

 Bottom line?  If you had taken this article’s advice, you would have missed out on some juicy profit opportunities.

 Then there’s the classic 1979 article, “The Death of Equities”, published in Business Week.

 It argued that the high inflation of the period made profiting in stocks practically impossible.

 You know how wrong that turned out to be?

 From the time the article appeared on Aug. 12, 1979, through to the end of June 2019, the S&P 500 rose a whopping 2,639%.

 To put that in perspective, that equates to an annualized return of 8.3%… enough to put some serious cash into your retirement nest egg.

 I could go on and on with more examples of bad media market predictions, but you get the picture.

 Here’s something else you need to understand…

When the media predicts a market move, you can bet it will make a lot of sense

The arguments making the case for the prediction will seem well thought out and logical, based on what is already known.

 And it’s always tempting to believe them. 

But that logic is backwards. 

 You know why?

The market moves on new information… not already-known facts.

 What happens next – and how it jives with market expectations – is what drives the market.

Not yesterday’s news. 

As the saying goes, past performance does not predict future returns. The same can be said for market moves. 

 

Another thing…

There’s an ulterior motive to media market predictions you MUST understand

The mainstream financial media doesn’t really care whether you agree with their market advice… or whether you follow it… or even if the advice is accurate.

They only care about one thing – making money by holding your attention.

They do that by selling ads… and doing everything possible to get you to watch them.

That’s why they project so much sensationalism. They thrive off of fear and greed.

To get and keep your attention, they need to keep ramping up the tension.

Whether they’re breathlessly saying gold’s going to the moon… or warning that the market’s about to crash… their goal is to keep you anxious.

They want you to feel like you must know what will happen next… and to trust them to reveal what that “next” is going to be.

So their job is to keep you on edge so you stay tuned through the commercial breaks.

But here’s the good news – you don’t need the mainstream financial media to guide your investment decisions.

In fact, you should ignore their advice.

Do that and you’ll have taken a big first step toward taking the emotion out of your investing.

Three more things you can do to take emotions out of your trading

First, understand that in the short-term, the market can go up or down in ways that may seem illogical.

That’s why investing for the long-term is such a powerful, time-proven strategy – it helps you invest unemotionally.

Assuming you’ve done your homework on your longer term investments… and you’ve developed a thesis based on that homework… you can weather adverse short-term moves with confidence.

Second, you need to have complete clarity on how much risk you’re willing to tolerate in your portfolio.

Here’s an example. Suppose you have some volatile biotech stocks in your portfolio. If you find yourself losing sleep over them, you might want to consider less speculative investments.

And third, you have to be clear on the goal of your portfolio.

Are you relatively young with a long career still ahead of you?

Then perhaps you can afford to make riskier investments that offer a higher reward potential in the short-term (or, alternatively, you may need to reevaluate what you expect from your retirement).

Do you want to augment your retirement income?

Then you may be okay with blue chip stocks that have consistently paid decent dividends.

Are you a long-term investor looking for capital appreciation?

Then you’ll have to discipline yourself not to panic in the face of inevitable market moves against you.

Regardless of your trading strategies and investment goals, never forget that any advice you hear from the mainstream financial media is best avoided (although I admit it does have some entertainment value).

That’s all I have for you today.

Until next time,

Doug Fogel

Contributing Editor, Dear Retail

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