Controversy is catnip to the financial media

• Posted by: abnormalreturns, February 22nd, 2012 at 9:20 am
• Comments: 0

One of the hardest things for novice investors to understand is that the financial media is not there to provide you intelligent, actionable financial advice.  The goal of the (financial) media is to generate profits and that comes by generating viewership and/or eyeballs.  That is why you continue to see the same guests, despite their wrong calls, again and again in the media.  The financial media does not in any sense of the word have any fiduciary duties toward you.  This a really important point, one that we discuss in our forthcoming book.  You are in a very real sense on your own when it comes to how you consume, or not, the financial media.

The same is true of the sell-side as well.  Wall Street analysts and strategists are not paid on the accuracy of their calls. They are paid by the business, i.e. commissions, they generate.  Would they like to be correct?  Sure, but being correct does not necessarily pay the bills.  That is why analysts can continue to miss on earnings estimates and why strategists can continually call for the S&P 500 to be up 10% every year.  Being right isn’t what matters, so long as the clients are happy.

These two points were driven home today in posts we noted earlier in the morning linkfest. The first item comes from the sell-side where Joe Weisenthal at Business Insider takes to task investment strategist Bob Janjuah for failing to face up to his mistakes.  Janjuah, a noted bear, in a recent piece tried to push off the blame for his incorrect calls onto the world’s central banks.  Weisenthal writes:

Bottom line: It’s Janjuah’s job to anticipate what central banks are going to do, the central banks haven’t done anything that bizarre, and there are fundamentals to back up the market turnaround. The idea that the market is now just such a tangled mess that it’s impossible to assess is nonsense.  And in general, this whole blaming authorities for your missing rallies is just not a good look for anyone.

Janjuah has made the classic mistake of confusing normative and positive economics.  In short, mistaking what should be, for what is.  Another example of this at work is Meredith Whitney.  Whitney is best known for her high profile call towards the end of 2010 for a surge in state and municipal bankruptcies that sent the municipal bond market into a tailspin.  Despite her hypothesis having been proven incorrect Whitney continues to be a media star.

So much so that Whitney recently signed a high-profile book deal to detail her thesis at length.  The book publishers are likely not as interested in her thesis as they are in the fact that Whitney is, according to Kevin Roose at Dealbook notes:

Still, as a Paris Hilton-imitating, professional wrestler-marrying market maven, Ms. Whitney is doubtless one of the most entertaining equity analysts out there.

It no doubt helps that the publisher knows that the Whitney book is likely to be “somewhat controversial” with a lot of “strong feelings on the issue.”  Controversy sells books.  One need not know much more than that to understand this announcement.

Controversy is interesting.  Railing against the world’s central banks is fun.  These viewpoints generate buzz and media coverage.  However in neither case do they necessarily help the investor make better more informed decisions.  The very best investors are politically agnostic in that they divorce their political views from their investing decisions.  Paying much attention to the media for whom controversy is catnip is at best a waste of time and at worst a waste of money.