Shareholders and others sometimes ask: “where do you get the information you need to invest?” In response, I say something like: “every business day I scan headlines in major financial publications in Australia, Britain, Europe and North America. As a rule, I ignore opinion pieces and prognostications about markets and the economy. But I skim all articles about companies, occasionally read one carefully – and in response, a few times a year I undertake my own research. Mostly, I read financial statements and company reports, as well as financial, economic and general history. I read voraciously but selectively – and over time my reading has become more intense and discriminating.” The problem, as I wrote in The Evil Princes of Martin Place, is:
If you rely upon the mainstream media for information, and particularly for insights into economics and finance, you’ll be woefully misinformed. Thomas Jefferson’s youthful confidence in a free press foundered on the shoals of reality, and in his later years he came to despise journalism. On the grounds that it’s far better to be ignorant than misinformed, he advised one young man never to read the newspapers.
This problem has important consequences. These days, many investors (most of whom are actually speculators) are superficially knowledgeable. Fundamentally, however, they – including some very prominent and vocal ones – seem to comprehend surprisingly little. Why? Perhaps it’s their addiction to a toxic (in more than small doses) form of information called “news.” The consumption of news – particularly its online and TV variants – handicaps investors by hindering their thinking. If anything, the less news that the investor consumes – that is, the fewer the irrelevant and damaging stimuli that bombard her senses – the bigger is her advantage and the better will be her long-term results. In this first part of a two-part series, I show that the consumption of news is mostly a costly and misleading waste of time; in the second, I cite evidence that over-consumption impairs your mental and physical well-being. In both respects, you become a poorer investor.
What is “News”?
“News” is anecdotal – and not necessary objective, substantiated or even true – information about very recent events and utterances. Typical examples: yesterday, the yield of U.S. Treasuries rose and the price of Brent crude fell; this morning, the Treasurer stated that he was confident that the economy would “recover;” minutes ago, the CEO of X Ltd stated that it would trim its “brick-and-mortar” operations and expand its presence online, etc. From the point of view of an investor worthy of the label, the trouble with such “news” is that it’s mostly the same old wine that’s been repackaged in a new bottle. On 27 July 2003, in an article in The Wall Street Journal entitled “Nothing in the News Is Actually New,” Jonathan Clements wrote insightfully:
Meet my nemesis: It’s called news. What’s hot? What’s the buzz? What’s new? These are the sort of questions editors like to ask. And they drive me bananas. To be sure, newspapers are supposed to carry news, so reporting the latest Wall Street developments might seem entirely reasonable. But I would argue that a focus on the news is scant help to investors, and it can be downright dangerous.
Consider the key question: What should investors do today? The answer: The same thing they should have done last year, and the year before that, and the year before that. Investors should focus on their financial goals, save diligently, diversify broadly, hold down investment costs, minimize taxes and rebalance regularly. Yet, if you pay too much attention to the news, it can be awfully tough to stick with these prudent strategies.
Despite financial journalists’ obsession with news, there’s actually very little that’s genuinely new in financial markets. True, the market changes constantly. But the response from investors and Wall Street is all too predictable. As stock and bond prices rise and fall, investors grow overly self-confident or excessively cautious, and they are tempted to ditch their current investments. To make a few bucks off the resulting frenzy, Wall Street dusts off long-neglected products and strategies and offers them up as new and exciting.
News Systematically Misleads
The problem isn’t merely that little “news” is actually new. Much more fundamentally, by its very nature news doesn’t fully (or even accurately) describe the real world. I doubt that journalists as a whole wilfully intend to hoodwink their audience. Some clearly do, but that’s not the point: the point is that news typically misinforms. Reporters’ motivations may be innocent or even laudable, but the consequences of their actions can certainly be cynical and destructive. They strenuously deny it, but no matter; their unspoken maxims are: “if it bleeds, it leads” and “sex sells.”
Whether it’s a matter of nature or nurture, people naturally seek and pay closest attention to the anecdotal, disturbing, flashy, scandalous, sensational and sexual. Conversely, and again either through our genes or upbringing, people tend to discount or ignore balance, nuance, chains of reasoning, confrontations of unambiguous claims and valid and reliable data – and, more generally, knowledge that’s abstract, ambivalent, complex and subtle. Our cognitive apparatus, in short, possesses important shortcomings. Reporters are people; therefore reporters possess the same (more or less) mental weaknesses that afflict everybody – including investors and speculators.
By and large, publishers and broadcasters of news focus upon what’s highly visible and what elicits immediate, visceral and emotional reactions: that – and not analysis – is what attracts “eyeballs.” Journalists report gripping stories about and present riveting pictures of people, and they downplay the impersonal, impartial, intangible and tacit. News thereby accentuates what’s seen but not necessarily relevant, and discounts or ignores what’s unseen but potentially vital.
Even if he were inclined to do so (which, by and large, given the time and other pressures he faces, he isn’t) why would a reporter carefully dissect and explain the complexities and subtleties of fractional reserve banking when he can simply and evocatively depict the “greed” of bankers? News grabs our attention and manipulates our emotions. That’s what it’s designed to do because that’s the business model of news organisations.
News Is Usually Irrelevant
Unless you take conscious steps to protect yourself, news will bombard you ceaselessly. In 2011, the Pew Research Center, an American polling organisation, estimated that the average American presently encounters 25 items of news every day. That’s more than 9,000 per year! A decade later, thanks to “social media” (which is actually quite anti-social), the number is surely even greater. Of the many news reports you likely encountered during the past year, can you name one that enabled you to make a better decision about a serious matter affecting your life (or that of your nearest and dearest)?
The consumption of news is almost totally irrelevant to what really matters to you – namely your health, wealth, faith and relationships. At best, news is innocuous and entertaining; and worst (and as I’ll detail in my next wire), it’s dangerous and destructive. For investors, usually it’s simply immaterial.
Now assume that, against the odds, one piece of news substantially increases the quality of your life (compared to how your life would have unfolded if you hadn’t read or seen it). Through how much trivia, ephemera and outright drivel did your brain have to slog in order to uncover and polish that one relevant nugget? The trouble, of course, is that a priori we can’t identify the valuable item of news floating in a sea of dross. For that reason, many people attempt to digest everything in the news buffet. Is that possible? Probably not. Is it worthwhile? Almost certainly not. It’s very difficult to appreciate what’s enduringly relevant when ephemera clutter and sometimes overwhelm our senses. In sharp contrast, and no matter how many stimuli vie for our attention, it’s easy to distinguish what’s flashy. Importance doesn’t naturally attract our attention, but flamboyance does. That’s why the mainstream media emphasise the apparently and superficially new.
The critical question is: Does possession of the latest financial and economic news give investors a competitive advantage? Does it equip you to achieve profits and avoid losses? The answer to both questions is clearly “no” (see the references below).
Speculators become anxious when the flow of news stops – when, for example, they’re bushwalking through the Tasmanian wilderness or flying from Perth to Sydney. They fear that they might “miss something important.” Their dread is groundless: if something really relevant occurs, you’ll surely hear about it – even if you live in a cocoon. Your family, friends and colleagues will tell you – far more efficiently and reliably than any news organisation – about things that are relevant to you. Equally importantly, they’re less likely than news reports to bombard you with inanities and irrelevancies. You’ll learn far more about really important events, their causes and consequences by reading analyses in good books – and by talking about them to people whom you know and trust.
Consumption of News Increases Errors of Cognition
Heavy consumption of news feeds confirmation bias. Human beings are hard-wired to (1) exclude from consideration evidence that contradicts their preconceptions and (2) favour evidence that reconfirms their biases and prejudices. In the words of Warren Buffett, “what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” That’s confirmation bias. The stronger is your bias on a given issue, the more you’ll gravitate towards news sites that reconfirm rather than challenge your bias. The result is that news junkies inhabit a bubble that tries to protect them when their hunches, ideas and theories about the world (and themselves) confront an unco-operative reality. These junkies thereby become overconfident, take excessive risks, misjudge opportunities – and make costly mistakes.
Consumption of news exacerbates another cognitive error: the “story” or “narrative” bias. Our brains don’t merely crave stories: they need stories that “make sense” – even if they don’t correspond to reality. And news organisations are happy to deliver them. Instead of just reporting that the stock market declined (or increased) by 1% today, pundits solemnly proclaim: “the market declined today because of X.” This X could be concerns about rising rates of interest, unexpectedly poor payroll statistics, a decision taken by the Fed’s Open Markets Committee, a terrorist attack somewhere – or anything “newsworthy” that strikes the reporter’s fancy. And this “X” often varies from one “expert” to the next!
The plain truth is that we simply don’t – and can’t – know exactly why the stock market moves as it does from day to day: too many factors, which vary from one individual and place, etc., to another, are at play.
Of course, a specific factor (X) might have exerted a causal influence; but X’s role is uncertain and temporary, and other influences (Y, Z, etc.) may be much more significant. Most news reports are simply anecdotes, allegations and assertions that masquerade as and substitute for description and analysis. As such, they provide an unsatisfactory means to make some sense of the world. Accordingly, the smaller is the quantity of news we consume, the less it can cloud and distract our thinking.
Consumption of News Is Costly
Consumption of news doesn’t just waste time: it exacts exorbitant opportunity costs. First, count the time that the consumption of news demands. That’s the time you actually waste reading, hearing or watching the news. Second, consider the time it takes to refocus. That’s the time you squander trying to return to what you were doing before the news interrupted you. Every time you disrupt your work or leisure in order to check the news, this reorientation wastes more time. Third, news can distract you hours after you’ve digested today’s “hot” items. News stories and images may pop into your mind hours and sometimes days later, constantly interrupting your train of thought. Why would you want to do that to yourself?
If you read the newspaper for 15 minutes each morning, check the news on the internet for 15 minutes during lunch and watch a TV news bulletin 15 minutes before you go to bed, you’re cumulatively squandering a substantial amount of time. Then add a few minutes here and there when you’re at work, plus distraction and refocusing time. You’ll lose productive hours totalling at least half a working day every week!
Globally, the loss of productivity is enormous. Take as an example the 2008 terror attacks in Mumbai, India, where extremists murdered ca. 200 people. Imagine that a billion people devoted, on average, one hour of their attention to that tragedy: they followed the news, watched talking heads on TV, chatted about it, etc. India alone has a population of more than one billion. Many of them – according to news reports! – spent entire days following the drama in Mumbai. One billion people times one hour is one billion hours, which is more than 100,000 years. In 2008, the global average life expectancy was 66 years. The consumption of that one item of news swallowed the equivalent of nearly 2,000 lives. That’s ten times the number of people that terrorists murdered in that incident.
Data and information are no longer scarce commodities. Nor is news – which is why so many news organisations are in dire financial straits. But knowledge remains uncommon and wisdom is rare – and the effort required to obtain them is precious.
News Limits Comprehension
By its very nature, news possesses no explanatory power. Items of news are bubbles of factoids (that is, mostly irrelevancies and misinformation) that rise to the surface – and remain there for very short periods before they dissipate and others replace them. News organisations strive to report facts, but the facts that they prize are at best merely symptoms or indications of deeper causes which they routinely and even resolutely ignore. Both reporters and consumers of news make a cardinal mistake. They confuse two fundamentally different things: (a) familiarity with a litany of facts and (b) comprehending (however imperfectly) the processes that generated those facts.
For investors and properly-informed people more generally, it’s not facts per se that are important: it’s the logic, theory and patterns of cause-and-effect that connect facts. Whether as investors or in any other capacity, we should strive to comprehend (however imperfectly) the underlying processes that underlie the visible things that really matter to us – and candidly admit that we mostly can’t.
Understanding what happened is hardly easy, but it’s relatively straightforward; comprehending how and why it happened is the real challenge. Bankers, like virtually all people in all walks of life, are prone to greed. But what are the economic and financial processes that produce the perverse behavioural incentives to which bankers occasionally succumb? Unfortunately, few news organisations – or Royal Commissions! – seek to identify, describe and explain these incentives.
Why? Because the processes that underlie significant economic and financial (as well as social, political and technological, etc.) developments are always complex and often subtle. To journalists, therefore, they’re effectively invisible. Why do news organisations run anecdotes, scandals, people-stories and pictures? They are easy and cheap to produce, and they’re what many people want to hear and read. The important reports are non-stories: slow, powerful movements that develop below the radar but have a transformative effect over time.
Even if it were unbiased (which news isn’t), if you possessed more data and information, would you take better decisions? Both producers and consumers of news fervently believe so. Will accumulating the latest “facts” help you better to understand the world? Francis Bacon thought so, and so too do many of today’s investors.
Unfortunately for them, the relationship is actually the polar opposite: the more news you attempt to digest, the less of the big picture you’ll have the time and the energy to understand. No evidence indicates that data and information junkies make better decisions; plenty of evidence, however, concludes that information overload contributes to poor decisions. News junkies actually obtain poorer investment results than average (see the references).
If more information begets higher economic and financial success, then journalists would sit at the top of the economic pyramid. Obviously, they don’t! We don’t know exactly what makes people materially successful, but amassing factoids certainly doesn’t. Thomas Jefferson was right: relying primarily upon “news” in order to make sense of the world is not just futile: it’s worse than not acquiring any information. His prescription was also sensible: limit your consumption of news as much as you can.
Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics, 2nd ed., Simon & Schuster, 2010.
Terence Odean, “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,” Review of Financial Studies, Vol. 21, 2008, pp. 785-818.
Terence Odean, “Do Investors Trade Too Much?” American Economic Review, Vol. 89, December 1999, pp. 1279-1298.