Financial Pornography

Yesterday I was looking for some information on the Internet, and I ended up watching a few video clips from one of these business news channels. This is unusual for me.

When I say unusual I’m not referring to researching stuff – I usually spend about 2 hours a day reading – I’m referring to giving any attention whatsoever to the business news channel. Which is interesting when you think of it. I spend about 2 hours a day on research, and I never watch the business news.

Why would that be? Simple, really. For the most part, the business news channels are nothing more than financial pornography.

I know that these types of programs have their loyal followings, but the simple truth is that a bunch of self-proclaimed gurus sitting around giving 30-second sound bites on which direction the market is going in the next five minutes is nothing more than a tawdry, often lurid, way of getting your attention. It’s not wisdom; it’s the professional wrestling of the business world.

The term financial pornography has been around for a decade or so, but it’s still rather loosely defined. Paraphrasing my dictionary’s definition of the word pornography, one could say it means the sensational depiction of behaviour designed primarily to cause excitement.

Financial porn is everywhere. Here are some catchy phrases from a story that I read just this morning: “the latest turn in the expanding spiral of trouble for financial markets, one that won’t go away just because investors stuck their heads in the sand for a day” and “in the current environment, that’s the business equivalent of playing road hockey on a freeway” and, in reference to some potentially optimistic developments, “those were just a couple of nice-looking trees in a burning forest.”

Geez, does it sound like a sensational depiction of behaviour designed primarily to cause excitement? Ya think?

Financial porn is not random, nor coincidental, nor accidental. It is completely intentional, but you don’t need to simply take my word for it.

In an article entitled “Confessions of a Former Mutual Funds Reporter” that appeared in the April 26, 1999 issue of Fortune Magazine, the anonymous author, who works for the very same Fortune magazine, writes, “Mutual funds reporters lead a secret investing life. By day we write “Six Funds to Buy NOW!” We seem to delight in dangerous sectors like technology. We appear fascinated with one-week returns. By night, however, we invest in sensible index funds.”

“I know, because I once was one of those reporters–condemned to write a new fund story every day–when I covered funds for an online publication. I was ignorant. My only personal experience had been bumbling into a load fund until a colleague steered me to an S&P 500 index fund.”

“I worried I’d misdirect readers, but I was assured that in personal-finance journalism it doesn’t matter if the advice turns out to be right, as long as it’s logical. You’re supposed to produce the most stories “that end in investment decisions,” so publications substitute formulas for wisdom. The formula for recommending funds: Filter according to returns, then add something trendy.”

“The problem is that recent returns, whether from one week or the old standby three years, don’t predict future results. Nothing predicts future results. The best you can do is to hold on to low-cost, diversified funds and be oblivious to short-term static.”

“We did tell people that. But we were preaching buy-and-hold marriage while implicitly endorsing hot-fund promiscuity. The better we understood the industry, the sillier our stories seemed. When a certain colleague would see a rival publication with its obligatory SIX FUNDS TO BUY NOW! headline, he would slap the magazine down on his desk and protest with feigned jealousy, “We were scooped! They stole our story!”

“Unfortunately, rational, pro-index-fund stories don’t sell magazines, cause hits on Websites, or boost Nielsen ratings. So rest assured: You’ll keep on seeing those enticing but worthless SIX FUNDS TO BUY NOW! headlines as long as there are personal-finance media.”

You see, the thing about this is that if you are a talking head on a business news network the name of the game isn’t being accurate. It’s all about getting your attention, and there really is no downside to being wrong.

So they can fire away with melodramatic phrases like “those were just a couple of nice-looking trees in a burning forest” and call it reporting the news. They can write articles titled “Six Funds to Buy NOW!” and call it timely and reasoned advice.

From that perspective, all the better to pump out liberal doses of financial porn, since the objective is not to be accurate as much as it is to be entertaining. Be dramatic. Be flamboyant. Be wrong even. Just don’t be boring.

The problem is that a sensational depiction of behaviour designed primarily to cause excitement can put the reader in a bad state of mind for making smart financial decisions. And, although some financial pornography is benign, unfortunately some of it isn’t.

If you see stuff like “Get your money out of your RRSP tax-free” or “Get a $10,000 tax deduction with a $2000 charitable donation” or “Make 60% returns guaranteed with off-shore investments”, please recognize this for what it is.

Meanwhile, as my friends at Brandes Investment Partners say, “We take a long-term perspective, and believe that no, or very little, short-term ‘market news’ provides useful information to value investors.”

This article was posted in All Columns, Investment Management.
Are you ready to reach your great goals? Contact us today!
Back To Top