Investors are battered daily with an avalanche of financial information. Much of it is wrong. The securities industry spends hundreds of millions of dollars annually sponsoring all forms of financial media, a great portion of which is little more than an infomercial for its services.
The consequence of so much sponsored media content masking as financial journalism is quite predictable. Investors accept many myths propagated by the securities industry, and have harmed themselves significantly as a result.
The full truth is even more insidious. The securities industry has figured out how to subconsciously trigger knee-jerk responses that encourage bad investor behavior. It does so largely by instilling fear and anxiety, and playing on the appeal of greed.
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When will financial journalists draw a line between entertainment and information?
According to a new book, people subconsciously shut off the part of their brain when watching some financial news shows.
The book, "Clash of the Financial Pundits," co-authored by Jeff Macke and Joshua M. Brown, is a fascinating insight into the real agenda of many financial news outlets. Their mandate is to entertain, even when doing so means giving investment advice that is harmful to investors. Macke was a financial journalist at CNBC’s “Fast Money” and now is a host of “Breakout” on Yahoo Finance. Brown is a frequent contributor to CNBC and writes a blog at The Reformed Broker. The index investing site, Canadian Couch Potato, published a couple of interesting excerpts from the book, such as:
“People have been shown to prefer commentators with unwavering confidence over those who are more reserved and have actually gotten things right. The research shows that in the presence of someone speaking emphatically about events to come, people subconsciously shut off the part of their brain that reminds them this cannot actually be done.”
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It's not too late to make some summer reading recommendations, and a quick review of my bookcase turned up some titles I think would be valuable for any investor. These books cover topics ranging from a detailed explanation of how the markets really work to the basic benefits of financial planning and some of the common behavioral errors investors make. Each book holds many helpful insights, and each is well worth the investment.
"Market Sense and Nonsense"
While not a book for novice investors, Jack Schwager's "Market Sense and Nonsense: How the Markets Really Work (and How They Don't)" is still an accessible read for investors interested in learning the truth behind the way many people think the markets work.
Schwager, who breaks his book into 21 short chapters, provides an education on many important facts and myths about the investment management business. He does so in a concise and entertaining way. The sections on measuring risk, understanding correlation (an often misunderstood topic) and how the use of leverage affects risk and return are particularly good.
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