An increasing amount of financial news is becoming available across a variety of media, but just how much of it is of any real value to investors? Nick Dewhirst investigates
Financial news is everywhere and demand for it is growing. Dedicated television services, financial newspapers and magazines all offer 'breaking' news on financial markets and because it is free, there is a temptation for investors to consume too much of it.
Because there is no direct payment, it is easy to forget news vendors are in business to make money - just like sellers of financial services. Essentially, their business model provides free news in order to sell advertisements, and that applies as much to financial news and advertisements as any other types of news. The aim of the game is to attract as much attention as possible, in order to maximise the amount of advertising that can be sold. Therefore, it is necessary to maximise excitement and suspense.
Indeed, the financial TV programmes that became popular during the technology, media and telecoms (TMT) bubble appear to have copied the traditions of sports reporting - running commentary, instant analysis, opposing protagonists, pre-match speculation, post-match debriefing and as many scores, or figures, as possible.
Just as the need for action reduces cricket matches from five-day marathons to Twenty20 (20 overs per side), so too is long-term investment replaced by day trading. That may well improve stock exchange commissions, but it seldom results in riches for investors who pay those commissions.
For example, a typical daily stock market report may revolve around the latest economic figure to be announced. In the best traditions of balanced reporting, Economist X of ABC Bank will say the market should improve if the figure is good, while Trader Y of a global hedge fund will be quoted as saying prices could fall if it is disappointing. In live reporting, the commentator will inevitably conclude that whatever happens, there will be volatility, otherwise known as excitement.
Long-term investors may think this does not affect them but it does, because the domination of short-term stories in the free news media means there is little room for longer-term analysis.
Most of such news is in fact merely noise - random sound without much significance. This can be illustrated by the most talked about figure of all, the discount rate at the US Federal Reserve Bank.
As shown in the chart (right), this figure is so important it has become an excellent predictor of changes in gross domestic product a year ahead, ever since the battle against inflation reached its turning point in the early 1980s.
Every month the board meets, so there are opportunities for news stories about pre-meeting speculation and more news stories about the outcome. The headline for the Financial Times on 9 August 2006 was an extreme example: "US rates held for first time in two years," meaning nothing happened.
Then there is the analysis of any statement made by the chairman and whether a slight variation in wording compared to a previous statement indicates a change in policy? An army of Fed-watchers is gainfully employed in this pursuit.
The truth is so mundane that it would be banal if it were not so important. Firstly, the Federal Reserve chairmen is employed to talk out of both sides of his mouth simultaneously, just in case a piece of unexpected news subsequently occurs, which might justify a change in direction.
Secondly, rates continue moving in the same direction until the direction is changed and that happens very infrequently - so infrequently that it has only changed 22 times in 40 years and only 13 times in the last three decades.
Here, speculation is so easy that little time need be wasted on even the most important figure in the world. Elsewhere, speculation on other figures may be harder, but is largely pointless because one figure pointing one way on one day may be countered by another figure pointing the other way on the next day. For example, good growth today, inflationary concerns tomorrow.
This noise is not costless, as one is tempted into believing. More seriously, stories only make the front page when they are at their peak and that is as true of the Hello curse on celebrity marriages as that of business journals on investment gurus and their theories.
It is well known that elections are won by focusing attention on the issues naturally favourable to one's cause. Thus health stories favour the left, while law and order issues favour the right. Similarly, good news stories about record takeovers encourage bullishness while negative stories about wars or bankruptcies encourage bearishness.
Since the former happen at market peaks and the latter at troughs, those who pay too much attention are lured into buying high and selling low.
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