Sunday, June 28, 2009

Popcorn Finance

From "Outside the Flags" by Jim Parker, DFA Australia (June 2009)

It's not often appreciated, but financial television is designed first and foremost as an entertainment medium. And that wouldn't matter so much hadn't real investors used its content to guide their own strategies.

Anyone who has worked as a presenter on network financial television (and this writer is one of them) knows the standard modus operandi is to treat investment like sports news — lots of colour, movement and volume.

That is why when you watch CNBC or one of the other business networks, you see multiple talking heads all yelling over the top of each other while animated line charts criss-cross the screen in a smorgasbord of colour.

But while there is nothing wrong with making entertainment the priority insports, producers who seek to turn investment into a circus could be accused of playing games with the hard-earned wealth of ordinary people.

Fortunately for investors, the networks' game is finally up. The global financial crisis has exposed the failure of many of the self-proclaimed journalists of financial television to represent the interests of the viewing audience.

What changed? Well, as revealed by comedian John Stewart in his much linked interview with CNBC host Jim Cramer [see video below], the business networks started to see themselves as a kind of cheer squad for Wall Street's worst excesses.

Essentially, the finance anchors were so busy throwing soft ball questions to options-driven investment bankers and characterising speculation as investment that they neglected to do the job that they prided themselves on — helping ordinary investors making informed decisions about their money.

Now there are calls for reform of financial television to steer it back onto the path of placing a priority on providing viewers with good, accurate information devoid of sales spin. Making it entertaining should be secondary.

Among the would-be reformers is Barry Ritholtz, a prominent blogger, financial commentator and frequent guest on the business shows.

Ritholtz has drawn up a 16-point menu for change, which includes such sensible suggestions as stopping the yelling, reinforcing the risk-reward trade-off, separating the long-term signal from the short-term noise, checking facts, insisting on accountability and respecting the audience.

This is a menu that Dimensional has been recommending for years. In dietary terms, it is admittedly an approach to investment that is more akin to fresh fruit and vegetables than to popcorn. But it's better for you.