Editor’s Note: It is our belief that all financial networks share the biases we describe in this article. We mention CNBC specifically because it is the leader in market coverage, because we have watched CNBC for years and watch it every day. We do switch channels from time to time to watch Fox Business and view the interviews on Bloomberg.com. As far as we can tell, these two networks share the same coverage characteristics we attribute to CNBC in this article .
Remember the aged and sage exhortation “Know Thyself”. In this article, we put forth our case that this is the most significant requirement of success in investing your own money.
It is critical for individual investors to know or understand their inherent biases. It is these biases that:
These are turbulent days indeed and watching financial networks like CNBC is the easiest way to get information on fast moving events and to learn from the advise of the experts they bring on as guests. That is why we watch CNBC every day.
But when you watch CNBC or any other financial network, you need to remind yourself constantly that these networks are ratings collectors first and foremost. As a corollary, these networks will do everything they can to keep you watching and listening. To do so, they focus their efforts to accentuate your biases, to tell you essentially what you want to hear.
Every Wall Street Salesman is taught “if the customer wants wool, sell them wool, if they want cotton, sell them cotton”. This is why Wall Street Firms try to sell as many products as possible. Every sales person is also taught that trying to change the customer’s mind takes two sales, first to change their mind and then second to sell them the product. Making two sales is much harder making one sale. In addition, you have the penalty of buyer’s remorse. If you turn out to be wrong, then the customers really get upset with you for changing their minds. (Jim Cramer is the only one we know who explicitly tries to “teach” his viewers to change their habits – kudos to him)
This Wall Street approach is what CNBC and other networks use. They focus their coverage on what they believe you want to hear and they trot out Money Managers to support that point of view.
Why do Money Managers come on CNBC and other networks? Simply put, it is free marketing and publicity to a wide audience. Money Managers get to pitch their skills and image before a large group of potential customers and CNBC gets free content. It is a sweet deal for both of them.
This is why the Money Managers are selected to fit the message that CNBC wants to convey based on what they think you want to hear. If they do not follow the agenda, they are probably not invited back, unless of course they are legends and CNBC needs them to promote their shows.
So, you see it all begins with your own beliefs and desires or what is called in statistically theory as your “biases”.
What are a few of these biases?
1. Stocks as the main instrument for returns
Today, the most prevalent bias is towards stock-investing. Individual Investors have come to fully embrace the notion that stocks are the only or, at least, the best way to get high returns. They realize that stocks can be risky but have also fully embraced the fallacious notion that high risk is required for high returns.
This bias also fits in very well with the holy grail of individual investing – to find a stock or a sector with enough promise to make you rich. This bias made people fall in love with
Investors made a lot of money in these sectors but fell in such love with the underlying themes that they refused to sell these stocks when they should have.
Today, individual investors have forgotten that US Treasuries can deliver powerful returns. They have forgotten it to the point that most investors believe that US Treasuries are only a place to hide during difficult times in the stock market.
As a result, in the words of David Rosenberg of Merrill Lynch, “..the government bond share of total household financial assets is currently less than 1%, and it has never before been so low”.
This may be why CNBC Anchors avoid mentioning US Treasuries except as a place to hide (see our article “Are CNBC Anchors on a Mission Against US Treasuries – A Viewers’s Perspectives” – August 23, 2008 – www.cinemarasik.com/2008/08/19/are-cnbc-anchors-on-a-mission-against-us-treasuries–a-viewers-perpsectives.aspx
This is also true of Equity Managers who appear on CNBC. You will never ever hear these managers recommend US Treasuries except in a derogatory or derisive manner.
What about CNBC’s Advertisers? Most of the big Advertisers are Brokerage firms like Schwab, Fidelity, Merrill Lynch etc. You know that Brokers make far money selling you stocks than they do by selling you treasuries.
So this completes the wonderful daisy chain:
What is the result? For the last ten years, the return from S&P 500 is negative (yes, holding stocks for ten years has lost you money) while simple, safe US Treasuries have given you better returns.
2. Wealthy Investors are smarter than you and they get better advice than you
This is probably the most commonly held bias. People feel instinctively that rich people get better advice and better investment products than they do.
This is a belief that brokerage firms encourage. This enables them to tier investment products and encourage their customers to put more money with their firm.
The most common method is the segregated account. Smaller investors are herded into mutual funds and larger investors are offered segregated accounts that are “separately” managed by the same or other money managers. This is utter rubbish. Segregated accounts are no better or different than mutual funds in terms of investing success. In some instances and especially when you are trying to get out, segregated accounts are far worse for you than your basic mutual fund.
A similar bias is that wealthy investors get access to “better” or “sophisticated” products than the average investor. They do get access to different products than the average investor. If you are an average investor, thank your stars that you did not have access to these “better” or “sophisticated” products.
The product disaster of 2008 is the Auction Rate Securities product. This was sold as a “cash equivalent” product to wealthy investors. The vast majority of wealthy investors owned boatloads of these securities in their portfolios. They got a rude awakening in 2008 when they found they could not sell these “cash equivalent” products at all. Finally, the regulators had to get involved and the major brokerage firms were fined sizable amounts for their role in selling these products to wealthy investors.
During the last few years, wealthy investors were sold on the promise of high returns from sophisticated strategies used by hedge funds. Today, we hear that these wealthy investors are running out of these hedge funds far faster than they went in.
Aren’t you glad that you did not have access to these products?
The sad truth is that the wealthy investors, as a class, are more dumb than the average individual investor. We do not kid you. This is the truth.
Private Banks and Private Wealth Groups at major Brokerage Firms are very good at stroking the egos of wealthy investors. They also deliver a higher level of service to the wealthy investors. Wealthy investors tend to assume that better service means greater investing success.
Mistake, Big Mistake. The sad reality is that wealthy investors get taken for a ride more easily and more often than the average individual investor. Wealthy investors tend to be lax and complacent about their investments. They tend to place far greater trust in the ability of their broker, advisor or wealth manager than they should. The result is that wealthy investor portfolios tend to become full of high margin products (high margin is industry slang for products that generate the highest level of fees and commissions for the broker) that are more risky and less liquid.
So, if you are an average investor, be happy that you do not have access to what wealthy investors are offered.
The key to investing success is simplicity and liquidity.
3. You should listen to Large Money Managers
Most individual investors believe that,
This is the basic CNBC canard. Turn on CNBC (or Fox or Bloomberg) any day. You will see Anchors on CNBC, Fox and Bloomberg promoting interviews with Managers that manage hundreds of millions and billions of dollars.
You cannot blame CNBC or the others. Access to great investors is exactly why we and so many investors watch CNBC every day. There are so many great investors CNBC brings on the air:
But the vast majority of CNBC guests are large equity managers who can do you more harm than good if you listen to them. These large equity managers sell you the same shtick:
- Stay fully invested for the long term and that by being long term investors you will meet your goals – You have to understand that large equity markets are large fee collectors. These managers charge you management fees every day you remain invested with them. The longer you remain invested and the larger your investment, the greater the amount of fees they collect. Their fees do not go down when you lose money. So, being an equity manager is above all being a fee collector. There are three specific reasons why they will never ever tell you to get out of the equity market.
- If you get out of the stock market, you may not come back,
- If they suggest you get out and stock market goes up, then you will blame them for making a wrong call and making you the miss the upside,
- And they lose the fees for the time you remain out of the market.
- “It is a stock pickers market” – notice that the stock picks of the managers who peddle this shtick usually lose you money. They say this in any market because they are trying to prevent you from going to index funds that charge a fraction of what these large equity managers charge you.
So, next time a large equity manager tells you this drivel, send an email to CNBC (or Fox, or Bloomberg) and tell them to never invite that manager again.
The most important characteristic of an equity manager is that manager’s flexibility and their adeptness in saving your capital in down markets.
If you want to see a smart manager in action, listen to Jim Cramer of CNBC telling viewers on Monday, October 6, to take money OUT of the stock market if you need it during the next 5 years. We rate this as the best piece of advice rendered on CNBC all year. No one else on CNBC ever says this so boldly and explicitly.
Unlike Cramer and Fast Money Traders, the rest of CNBC continues to bring out large equity fee collectors to tell you to be fully invested for the long term. That supports your own inherent bias and CNBC, being the largest ratings collector, will always augment your biases.
So, if you are an individual investor, know thyself and thy biases. If you know what your biases are, you will protect yourself from being sold by ratings collector financial anchors or fee collector equity managers.
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