I used to be a lawyer representing aggrieved investors who lost money due to misconduct of their brokers. Brokers would often defend their conduct by explaining how diligent they were in “watching the market”. My favorite question on cross-examination was this: “What are you watching for?” I never got a straight answer.
I ask the same question when readers tell me they watch CNBC. The most common response is that they need to understand “what’s going on” in order to make intelligent financial decisions. This logic is fatally flawed.
By the time “breaking news” is disseminated on CNBC and in other financial media, the market has already reacted to it. The price of stocks has been instantly adjusted to incorporate the new data.
It gets worse.
It’s exceedingly difficult to relate a particular event to a change in stock price. One study looked at the 50 largest daily changes in the S&P 500 Index from 1946-1987. The researchers found “few cases in which it could be said with any confidence that a particular event led to the change.” Many significant price changes appear to be unrelated to an obvious event and have “no easy explanation.”
CNBC does provide a wealth of financial news, but extrapolating that news to make investment decisions is a loser’s game.
Watching CNBC has another negative effect on investors.
Watching the ticker triggers an emotional reaction in our brain. The financial media understands this reaction. That’s why so much of its programming is “filled with urgent talk and screens are packed with ticker parades.” This programming stimulates a desire to “do something” to act on this information, when “doing nothing” is often the better course of action.
So what’s the surprising way to use CNBC to improve your returns? It was suggested by Michael Brush, a financial journalist, in this blog post:
Besides avoiding live quotes online, turn off CNBC.
All the way off. Not just the sound.
Try it. An added benefit will be a reduction in your stress level.
Every investor should read this article by Michael Brush. You’ll understand how your brain is being hijacked by the financial media to trick you into acting in a manner inconsistent with your best financial interest.
Solin Says: Repeat after me: Fees matter.