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Financial Gossip

February 20th, 2013

By Matthew Petersen

I’m not a fan of celebrity gossip or entertainment news shows that air on E and the like. I enjoy a different kind of “gossip” entertainment, in which I indulge through various media outlets such as CNBC, Bloomberg, The Wall Street Journal, etc. Don’t get me wrong, these media outlets do present some quality reporting (The Wall Street Journal), but an overwhelming chunk of the “flash” that’s presented is borderline gossip. Who can blame them, flash draws in viewership, but unlike E or Entertainment Tonight, the financial gossip has the capacity to result in negative financial consequences. One could argue that the poster boy for financial gossip is CNBC’s charismatic Jim Cramer (host of Mad Money), and whether you love or hate him, he is without a doubt one of the most visible and vocal financial pundits in the media. Jim Cramer is an entertainer through and through, but is acting on his and other media personalities’ advice dangerous? I would argue yes. I’m reminded of a New York Times article from May, 2011[i] that criticized Mr. Cramer for his recommendations that went sour, specifically regarding financials, but to spend time dissecting Mr. Cramer’s investment advice would avert focus from the philosophical root of the danger. I’ll concede that Mr. Cramer and many others with his investment philosophy are occasionally correct, but the root of this issue is their active management philosophy. Actively managed portfolios (stock pickers and market timers) as a whole under perform indices. Twice a year S&P comes out with a scorecard comparing actively managed funds to the indices. Below are the findings from mid-2012, courtesy of Forbes:

 

Within the U.S. equity space, over the last five years active equity managers in all the categories failed to outperform the corresponding benchmarks with the exception of large-cap value. More than 65 percent of the large-cap active managers lagged behind the S&P 500®, more than 81 percent of mid-cap funds were outperformed by the S&P MidCap 400® and over 77 percent of the small-cap funds were outperformed by the S&P SmallCap 600®, according to the study.[ii]

 

The article also points out, in regards to the category in which active beats the indices, that this should happen based on pure statistical randomness without any consistent empirical evidence to support continued active out performance above the indices. Furthermore, timing the market by moving monies in and out of the market last year most likely carried with it some sub-par performance as indicated by the graph[iii].

 

 

The entertainment and allure created by the various media outlets should be viewed as just that: entertainment. Entertainment should not be an aspect of investing that has a purpose of providing for retirement or any other substantial financial goal. As the old saying goes, “if you can’t beat ‘em, join ‘em”. Those that give up on trying to actively beat the market, and join those seeking to benefit from its inherent efficiencies, can sit back and indulge in the guilty pleasure that the financial media provides knowing that their financial advisor is hard at work planning and managing their road map for the greatest possibility of financial success.

 

[i] http://topics.nytimes.com/top/reference/timestopics/people/c/james_j_cramer/index.html

 

[ii] http://www.forbes.com/sites/rickferri/2012/10/11/indexes-beat-active-funds-again-in-sp-study/

 

[iii] Data obtained from Brent Brodeski’s Article “Should I Stay (in the market) or Should I Go (sell)?” 1/25/13

 

 

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