Don’t believe everything you read.
In previous articles I have talked about why most of the news is meaningless for retail investors, and the same applies to most financial commentary as well. With news, the issue is usually that writers try to answer the “whys” behind market movement, which is virtually impossible. The issue with financial commentary is that the articles almost always lack context. These issues are significant because, statistically speaking, it’s nearly impossible to determine or prove the “whys,” and context is essential to understanding the real meaning behind investing concepts or commentary.
Quality commentary is often crowded out by more sensational articles produced by hacks with serious conflicts of interest. Frequently this commentary is produced by writers with a service or product to sell, which motivates many writers to misrepresent the facts or to completely eliminate context, thereby rendering the content useless.
[VIDEO] Why Financial Writers and Analysts Mislead Readers
You better understand how this works by imagining that you have an investment product to sell. This product could be a seminar, book, investment advisory or even brokerage services. You can differentiate yourself from your competitors based on product, price, access and service quality — but that may not be enough. After all, who are you? What makes you so much better than the competition?
Wouldn’t it be great if you could show that you were either recommended by, or understood previously unknown secrets used by a real financial genius like William O’Neil or Warren Buffett?
If you could show that you alone understood the true nature of the Buffet or O’Neil methodology (especially if that methodology seemed contrary to stodgy conventional wisdom) you would look more credible. However, it is unlikely that either O’Neil or Buffett are going to even notice you, much less recommend you. But with a few creative quotes taken out of context an author or analyst can portray their product/service/advice as the portal to the true success formulas used by these legends.
Here is a specific example of this style of financial commentary:
There are several popular commentators and authors, including a prominent New York Times Bestselling author, Robert Kiyosaki, who are currently quoting Warren Buffett as saying:
“Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.”
That sounds pretty sensational doesn’t it? Diversification is easy and achievable by just about any investor, but if the most successful stock investor of all time says that it is a bad idea what are you to do?
Perhaps the answer is to buy the author’s book or his investing “kit” ($220) or perhaps his 3 day seminar ($5,000) or even personal coaching ($7,000+) – you get the idea. This pattern of writing sensational commentary that appears to be quoting Warren Buffet is misleading and represents a serious conflict of interest. There are many offenders and a quick internet search will show you how many other financial commentators are using the same model.
By the way; here are the facts about the example above:
The quote probably originates from a speech Buffett gave in 1998. While speaking to a group of MBA students at the University of Florida. Warren Buffett did make the comment above, however, it was prefaced with a qualifier that stated;
“I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.”
The truth is that Warren Buffett’s own investment company (Berkshire Hathaway) is very heavily diversified.
Any communication with an intent to deceive is a lie and excluding critical context like this is no exception. So as to not belabor the point too much, I have only used this one example in this article. Almost everyone in this business is selling something, and if their commentary is confusing, proprietary, or too good to be true, it is probably best to avoid whatever they are selling.
This article is really about education and how you can use it to tell the difference between the good and the bad media in the financial world. The good news is that there is a lot of quality free commentary and education from a variety of providers that can be used productively. There aren’t really any secrets out there it just requires a little effort. Learn to tell the difference and your reading time will become much more productive.