According to published reports, ratings for CNBC have dropped dramatically. Viewers of its morning business shows are down 10 percent. Big name shows like Squawk Box and Closing Bell have declined for four straight quarters. On April 23, only a pathetic 99,000 viewers watched Squawk Box.
This is good news for investors. The daily gist of CNBC is a steady parade of corporate executives touting the stock of their companies and fund managers who profess to have the ability to outperform the markets. Superimposed on this programming is “analysis” of financial news by self-styled “experts,” who opine on the events of the day.
This mish-mash of “financial information” is misleading to investors. It perpetuates the myth that owning individual stocks is a good idea, that some “expert” can tell you what stock to buy or sell and that you should attempt to select an actively managed mutual fund that will outperform its benchmark. All of this is presented against a backdrop of intense activity on the floor of the New York Stock Exchange and elsewhere, giving viewers a false sense of urgency and implying that minute-by-minute analysis of what’s going on in the markets is critical for investing success.
This noise is akin to the sound of coins dropping into slot machines in Las Vegas, giving gamblers the impression the next big “win” is as close as the press of the button on their machine. The gambling analogy is an apt one. Trying to pick outperforming stocks, time the market and attempt to select the next hot fund manager is a loser’s game. Eugene Fama and Kenneth French, both distinguished and extensively published professors of finance, summarized the issue cogently in their essay, “Why Active Investing is a Negative Sum Game”. Here’s their conclusion: “In short, active investing in any sector is always a zero sum game—before costs. After costs, active investing is a negative sum game.”
The fact that investors are abandoning CNBC in droves indicates this common sense message is getting through. According to the Investment Company Institute, the percent of investors using stock index funds has risen from 6.6 percent in 1997 to 16.4 percent in 2011. More than $1.1 trillion was invested in index funds as of year-end 2011. Almost one-third of all households that owned mutual funds had at least one index fund in their portfolios.
Investors in index funds understand that capital markets work. They seek to capture the returns of those markets. They focus on factors they can control, like fees, costs and taxes. For these investors, the musings of “reporters” on CNBC are nothing more than noise in the channel. Index investors understand that markets are driven by tomorrow’s news, and no one knows what that news will be.
I understand the claim that a financial network couldn’t last long repeating the mantra “buy index funds,” but that argument misses the point. There are many financial subjects that could be presented by CNBC (and others) that are supported by sound, academically-based principles of investing. I gave an example of a show that would really help investors in this sizzle reel.
For too many years, CNBC has provided a disservice to investors by feeding their gambling instincts. It’s comforting to see that the gig is (almost) up.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now, was published on Dec. 31, 2012.
The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.