Tuesday, August 24, 2010

What Makes The News? Not Accuracy!

What makes it as "news" in the mainstream financial media is what editors think will generate eyeballs and clicks; the media does not provide the kind of information that will make you money! The media makes nothing when you make money off of one of their forecasts, so why would they expend energy trying to make you money? But the media does make money when you click on an article, and so that's where they focus their energy. Understanding these incentives of the media is paramount to avoiding common pitfalls in investing.

For example, at the end of last week, Bloomberg ran an article that predicted oil was expected to fall in the coming week. Its thesis was reached with a poll that showed that more analysts see oil going lower in the next week than those who see it going higher. The article then went on to explain how global economic factors and higher inventories were contributing to this conclusion.

So should you short the oil market based on this article? Absolutely not! The survey has been conducted weekly since 2004 and has been correct just 48% of the time! The proverbial monkey throwing darts at a board divided into "higher" and "lower" halves would be right 50% of the time, so if anything this survey is a small contrarian indicator.

I'm not saying this because I expect oil to rise. (On the contrary, I've made it clear what I think will happen in cases where commodities, whether oil or gold or any other, deviate from their long-term averages for extended periods.) But the reality is, picking short-term directions in the prices of stocks or commodities is a crapshoot.

Articles in the financial news are meant to get you to read them, not to make you money. The sooner you realize this, the better the investment decisions you will make.

Disclosure: None

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