A few weeks ago, the outer edge of Hurricane Irene visited our area. I did what most people in the mid-Atlantic and Northeast did: prepared for the worst, hoped for the best, and watched the Weather Channel. Their coverage consisted of tracking the progress and direction of the storm, emergency updates, government press conferences, and commercials. I’m sure that their ratings were the best they’ve been all year. As far as ratings go, the Weather Channel might have hoped for a hurricane that would affect most of the highly-populated eastern seaboard. It was, quite literally, the perfect storm. But whether they hoped or not, human behavior does not change the path or size of a hurricane.
What about financial hurricanes? Doesn’t this same opportunity present itself to the financial media when markets take large dives? Unfortunately, many investors flock to financial press to find out how bad the damage is, where the market is going, and when the losses will be over. Of course, we know that this can’t be predicted, but we listen anyway.
The financial press may claim to be on your side, but their most important objective is to get viewers or readers to keep viewing or reading. One of their best methods for keeping us tuned in is to make today’s news seem much more important than it really is. The antithesis of hype is long-term, objective advice. It’s not exciting, and that’s why it is rarely seen. Can you imagine a cover story on Money magazine which reads, “Don’t Panic, Buy and Hold, Stay Diversified and Rebalance”? Instead we get headlines telling us what to buy, sell, invest in or do “Now!” Like always, investors keeping watching and keep reading.
Short-term thinking causes many investors to do the exact opposite of what they know they should. Nobody would intentionally buy high and sell low, but the evidence is we do it over and over again. Unlike weather reporting, which can be quite useful and keep people safe, financial reporting often influences investors to make impulse decisions that are at odds with their long-term goals and planning. No amount of weather reporting can change a storm, but the choices that investors make due to financial reporting can change the markets, often in ways that benefit the financial media. It’s the perfect storm.