Casual investors seem to believe that it is helpful to stay abreast of market news. Even market commentary seems important to them. They start to check stock prices daily and even watch BNN. How helpful is this?
How would you feel if you walked into your stockbroker’s office and she had BNN on. You ask her: “What are you watching?” “BNN,” she replies. “I’m just getting ideas for your portfolio.” If this seems perfectly logical to you, stop reading. The rest of us realize that the media simply filter and promote a single, narrow view of the world. I’ve had a number of examples of clients phoning to invest in a stock that they “found” on BNN, where the price had run up (causing the interest by BNN hosts, but then caused by the interest among BNN viewers), they purchased it and it continued to run for a day or two before falling back to pre-media coverage levels, well below what the client paid for it.
Market commentary is the worst form of this distraction, though. It consists of creating a backstory for whatever is happening or has happened in the market. Here is an example of something I received in my morning email, from my employer. This is verbatim, unedited, with nothing added or removed:
European stocks are higher in spite of political turmoil in the Middle East as investors have faith that the global economic recovery will not be swayed by current geopolitical challenges. Stocks in Asia however are sliding lower as fighting in Libya persists as higher oil prices weigh heavily on airline stocks.
Look at that. Fighting in Libya is NOT the reason that European stocks are higher, but fighting is Libya IS the reason Asian stocks are lower. The rest of the email read very similarly. I guess fighting in Libya is the only thing going on in the world that could explain the movement of stock markets. And as we’ve seen above, the effects are unpredictable.
In my mind, this type of intellectual dishonesty (unintentional, I’m sure) is why market commentary is useless and stock analysts can’t predict future prices. We don’t know what the outcome will be of the fighting in Libya, we don’t know what other global events might transpire and, even if we did, we can’t predict how they might affect the future prices of stocks.