Financial journalism in this country has hit a new low. It has historically been a source of misinformation for investors looking to improve their returns, so you shouldn’t be surprised.
In July, 2012, Nobel Laureate Paul Krugman was a guest on Squawk Box on CNBC. You are probably familiar with this show. A group of smug anchors discuss the market and convey the erroneous impression that listening to their views is helpful to struggling investors. Ray Dalio, of Bridgewater Associates, is a frequent guest. Dalio recently discussed the risks of investing in China and made predictions about the future of Europe. CNBC’s resident investment guru, Jim Cramer, weighed in with his views.
The underlying premise of these shows (and the views of the guests) is that they have the ability to predict the future, based on past events. The reality is all they can really do is discuss what has happened. This is information already in the public domain. They have no greater ability to predict the future than a monkey throwing a dart at a board. Tomorrow’s news determines future prices of stocks and bonds. They don’t know tomorrow’s news.
Krugman’s observations about his experience on Squawk Box are worthy of your attention. He noted on his blog that “[A]mong other things, people getting their news from sources like that are probably getting terrible advice about any kind of investment that depends on macroeconomics.”
Cramer continues to be a source of immense harm to those who rely on his musings. It is disgraceful that a prominent network continues to give him a forum. David Swensen, the chief investment officer of Yale’s endowment fund and author of Unconventional Success: A Fundamental Approach to Personal Investment, got it right when he told the Yale Alumni Magazine, “Cramer squanders his extraordinary credentials and shamelessly promotes stunningly inappropriate investment advice to an all-too-gullible audience.”
Yet another example of Cramer’s irresponsible conduct took place during an appearance on Meet the Press on May 20, 2012. He made this prediction: "I'm predicting bank runs in Spain and Italy in the next few weeks. Without coordinated policy there will be financial anarchy."
Last week, Italy and Spain announced they won’t request bailouts unless a surge in bond yields leaves them shut out of markets. The 10-year bond yield for bonds issued by both countries has dropped. Italy’s 10-year yield is 5.03 percent, down from a high of 7.5 percent on November 9, 2011. Spain’s yield dropped to 5.70 percent from its high of 7.75 percent on July 25, 2012.
There have been no “bank runs” and no “financial anarchy”. If anything, the situation in both Italy and Spain appears to be improving—the exact opposite of Cramer’s irresponsible prediction.
I hope you didn’t dump stocks you held in Italy and Spain based on Cramer’s comments. The iShares MSCI Italy Index (EWI), which tracks a broad index of stocks in Italy, has surged in the past three months (as of August 31, 2012), according to Yahoo Finance. It is up 18.72 percent over that period.
What about Spain? The iShares MSCI Spain Index (EWP) tracks a broad index of stocks based in Spain. According to Yahoo Finance, for the same period, it is up 25.83 percent.
Don’t look for a mea culpa from Cramer. If he had been right, he would be anointing himself as the next “great one”, an accolade he bestowed on former baseball center fielder Lenny Dykstra. Dykstra subsequently pleaded guilty to bankruptcy fraud, concealment of assets, and money laundering.
The media is a powerful force. In the financial area, it has been used to deplete your assets by making it seem that financial pundits and their guests are financial psychics. There is not one financial show on television that gives investors sound financial advice, based on peer-reviewed research. The securities industry wouldn’t stand for it, and they are the primary source of revenues for the current line-up.
It’s time for Vanguard, State Street Global, BlackRock, and Dimensional Fund Advisors to get behind a responsible financial program that would really help investors achieve returns that are theirs for the taking. Call me. I am ready to take it on. My first guest would be Paul Krugman.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.
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