Tuesday, October 14, 2014

Clash of the Financial Pundits

The book Clash of the Financial Pundits by Joshua M. Brown and Jeff Macke promises to tell readers “how the media influences your investment decisions.” For the most part the authors deliver on this promise. In the end this book solidified my view that it’s not worth paying any attention to those who make market predictions, but that’s not what the authors intended as the takeaway for readers.

Much of the book consists of transcripts of interviews with various financial pundits, the most well-known of which is Jim Cramer. While I found these interviews somewhat interesting, the best parts of the book were short chapters 9, 13, 15, and 19, none of which contained interviews.

Chapter 9 explained that the pundits who attract viewers are those who make the most outrageous predictions. “So long as you’ve still got a recognizable name, you’re still in the [punditry] game.” “And being right is irrelevant, so fire away!”

Chapter 13 explains that among pundits “it’s better to be confident than accurate.” Whether you really know what will happen isn’t important. What matters is “acting like you know.” This is “what the public wants anyway.”

Chapter 15 makes the very good point that well-known investment rules contradict each other. It goes on to list 18 pairs of rules that are contradictory. One example is “no one’s ever been wrong taking a profit! But let your profits run and don’t sell your winners.”

Chapter 19 shows how pundits make predictions in ways that allow them an out if the prediction turns out to be incorrect. They “couch their predictions in outrageousness and wackiness” or use “the subtle art of making a suggestion that can later be construed as a prediction” if the prediction turns out to be correct.

The authors try hard to make the case that to “have some hope that your portfolio will help you maintain your purchasing power through decades of retirement” you have to pay some attention to financial media. I’m not convinced. You need to learn about asset allocation and many other things, but you don’t have to listen to anyone who makes market predictions. As Charlie Munger said “Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”

I liked a quote from Ben Stein: “I have to say that every time I see anyone make a specific prediction about the future ... I shake my head because those predictions are useless. There’s only one guy whose predictions are incredibly useful; that’s John Bogle.” Bogle is considered the “father of index investing.”

In an exchange between Jeff Macke and Jim Cramer, they agree that their critics should just “take the other side of every trade.” This would be a dream for pundits. Everyone either loves you or hates you, but they all watch you. I think Cramer’s picks are just random and so I don’t pay any attention.

I liked one of Cramer’s quotes: “if you really understand [what you’re talking about] you can make it simple.” This is very true. Those who make things seem complicated often have a poor understanding of what they’re talking about. You need to understand a subject well to be able to explain it clearly.

In the authors’ conclusion they say that “predicting the future consistently cannot actually be done—by anyone” and “that despite this inability to be right all of the time (or even most of the time), there is still value to be gleaned from the words and ideas of the market commentariat class.” I disagree. All evidence is that people who act on ideas to beat the market end up losing to the market, on average. Mechanical strategies with appropriate levels of risk are a better bet than trying to outsmart other traders. What investors often need is an antidote to market pundits. During the 2008-2009 crash, Warren Buffett tried to remind people that the U.S. has a great economy and that the future would be better than the past, despite the then current troubles.

Another frequent justification in this book for the existence of pundits is that people wouldn’t watch a show that just said to buy index funds. This is true. I fully expect financial media to do whatever makes money. But attracting eyeballs isn’t proof that they are a net benefit to the viewers.

Overall, I found this book to be an easy and interesting read. It clearly lays out the techniques financial media use to attract viewers, which I liked. It even suggests that viewers should be very selective about what they watch. But, in my opinion, they still overstate the value of pundits.

4 comments:

  1. You can read it, listen to it and be entertained by the daily financial news. Just NEVER react to it!
    John Bogle was named one of the investment industry's four "Giants of the 20th Century" by Fortune magazine in 1999.
    I listen to everything he has to say! Love the guy!

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    1. @Peter: I'm a fan of Bogle too. I think it's hard to listen to a lot of financial media without ever being influenced into some action.

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  2. It was interesting how Macke sided with Cramer in the Jon Stewart debate, it seemed like it was out of admiration for the guy, I don't know. His argument boiled down to, "sure I said those harmful things those times, but you didn't show the other times that I helped people." Because Stewart didn't "really" understand what was going on, his points were dismissed as invalid. I thought that was bs.

    I agree, I thought the non-interview chapters were the most interesting, although I did enjoy the Ben Stein interview.

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    1. @Robb: As I often say, there was plenty of room for both Cramer and Stewart to be wrong. A fair criticism of Cramer is that he makes random stock recommendations pretending that he has useful input, and that he promotes the idea that retail investors can beat the markets. Stewart blamed Cramer for more than this.

      Among the interviews, I agree than Ben Stein's was the best.

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