Saturday, March 14, 2009

Dishonesty in finance and media

Diogenes once sought an honest man, and based on my experiences with financial services, he would have to look a long time to find one. Two media events today caused me to reflect on the degree of honesty in this sector.

The financial services where I’ve had the most interaction has been with real estate agents. A good agent would be honest, competent and always have the client’s (i.e. my) interests paramount.

In 25 years of buying and selling homes, I’ve had exactly two that get an A on all three counts. One left the business when she got married, and we lost touch. The other agent helped me buy my current Bay Area home, helping us look for eight months (and made five offers) while always putting our interests first.

In the long run, I think the commissioned Realtor® is going the way of the commissioned travel agent, disintermediated by greater availability of financial information made possible by the Internet. Fortunately for Rich, I think that the tidal wave will probably hit after he retires.

At the other extreme was the financial advice I was getting this morning when I flipped radio stations on the way to work. This investment show was run by a fee-based mutual fund company.

This is someone I’ve been suspicious of for a while, because his ads last fall implied that anyone should change brokers if they had a 30% drop in their 2008 stock balances. (The S&P 500 was down 39% for the year.)

Today he also pumped up mutual funds over real estate, based on a distorted representation of recent housing prices. Here in the Bay Area, $1 million in Palo Alto real estate would have certainly held up better than $1 million in the equity of Palo Alto tech companies.

What nearly caused my jaw to drop was his advice on “buy high, sell low.” The caller had two funds — one that lost 11% for 2009 and thus was in the “top 16%” for comparable funds, and another that was down more than 20% and was in the bottom 5% for the industry.

The advice of the “expert” was — absent any information other than the fund’s recent performance — was to sell the fund that was down the most. This is contrary to key principles of financial investing.

One principle is to buy low, suggesting that the depressed assets of this fund might have a great potential to rebound. The Forbes mutual fund rankings of the past 20-30 years have tended to show that good up market funds are bad down market funds, although there are a small number of funds that are good in both and a larger number of funds that are bad for both.

The other principle is — as my fund manager has emphasized over the past four months — what you hold should be determined only by its potential to appreciate from now on; the performance of the past two months tells us nothing about this. This is exactly what we teach in business schools: forget the sunk cost fallacy in any decision of whether to continue a strategy or investment.

Which brings to the Jon Stewart-Jim Cramer smackdown last week. I hadn’t heard about the show because I don’t watch cable, except the Sci-Fi channel and Man vs. Wild (before that, Survivorman).

However, catching up with my Facebook friends last night during a bout of insomnia, I noticed that many of them were praising Stewart for trashing Cramer.

Cramer is clearly a smart guy who understands financial markets. From what little I’ve seen — in hotel rooms and on — like other celebrity stock pickers there is a bias towards buy recommendations which makes him a bit of a tout. I wouldn’t trust any TV commentator for recommendations on a stock, market sentiment or a political candidate: the medium encourages oversimplification and exaggeration, not thoughtful analysis.

In 2008, Cramer was spectacularly wrong about the stock market, but then so was nearly nearly all of the financial media and the financial services industry. Few saw that subprime mortgage defaults would take down Wall Street investment banks, the stock market and eventually the entire global economy. Skeptical voices like the FT’s John Authers — who began calling out warnings back in April — were few and far between.

Despite Cramer’s manifest failings, there are three things that bother me about the fawning praise of Stewart and his staged confrontation with Cramer.

First, there’s no evidence that Stewart knows anything about investing, the economy or financial markets. So while (like the ambush interviews of 60 Minutes) he’s welcome to tear down anyone he wants, his choice of who to attack and who to promote is based on his own personal biases (or other factors) rather than a deeper understanding of the truth than his subjects. (A knowledgeable iconoclast like John Bogle is someone whose criticisms would actually tell us something.)

Second, I’m curious about the timing. The disaster of following bullish investment advisors was obvious in October or any other time since then, so why now?

Cramer and his CNBC colleagues have been among the few free market types with a microphone criticizing the excesses of the spendaholic administration and Congress, so is Stewart making (in effect) a partisan attack? Columnist Mark Hemingway puts it succinctly:

The problem is that Stewart’s critique of Jim Cramer, or of the financial press in general, is not new or particularly relevant — banks have been collapsing for a year. It only became an issue when Stewart wanted to delegitimize Santelli and Cramer’s comments on the Obama administration.
While normally such interpretations seem worthy of the black helicopter conspiracy theories, there is the administration’s semi-official reaction:
White House Press Secretary Robert Gibbs said Friday he "enjoyed" Jon Stewart taking down CNBC's Jim Cramer on his show on Thursday night. And giving an insight into the Obama-Gibbs relationship and what it is they talk about when they talk, Gibbs revealed that he and Obama discussed earlier Thursday watching the show.

Footnote: Gibbs has been scornful of some of the relentless cable output and was gleefully hard on CNBC's Rick Santelli who blasted Obama's home mortgage foreclosure plan.

At the Friday briefing Gibbs was asked, "Does the White House believe that this is the obligation of journalists to call out lies, to warn the public that there are dangers ahead?"

Gibbs said, "the President and I talked earlier in the day yesterday about watching it. I forgot to email and remind him that it was on, so I don't know if he's seen it. I enjoyed it thoroughly -- (laughter) -- despite, even as Mr. Stewart said, that it may have been uncomfortable to conduct and uncomfortable to watch.
At a minimum, this means that the president sees Stewart protecting his political flank. The FT’s Authers (one of the few investment analysts whose credibility was enhanced by the 2008 fiascos) on Friday called the Stewart-CNBC fight a “divisive political debate,” and concluded:
The populist anger, earlier directed against the president, now appeared to be aimed at those who had egged on the market.
Beyond any political motivation, there is the question of Stewart himself. Obama supporter Megan McArdle put it best:
Ultimately, I find Stewart disturbing because in some sense he's doing exactly what Cramer is--making powerful statements, and then when he gets called on him, retreating into the claim that well, you can't really expect him to act as if he were being taken seriously. Jim Cramer, whose stockpicking acumen seems slightly worse than your average monkey with a dartboard, frequently issues recommendations that people act on, then brushes off the failures with a shrug.

Jon Stewart also shapes peoples' decisions. Video is a medium with powerful claims to reality--people tend to think that if they saw it, it must be true. This makes it uniquely good at manipulating its audience with skillful editing. I'm very sympathetic to Stewart's deep critique of financial shows, but I don't think the way to go about it was to string together a bunch of very misleading clips. Nor to imply that Santelli, who has been vocally against all bailouts from the beginning, was merely frothing on the forclosure program because ordinary taxpayers were finally getting a taste of federal largesse. But Stewart carefully claims he's just an entertainer, so he has no obligation to hew to journalistic standards on things like quoting out of context.

Financial journalism isn't, as Stewart argues to Cramer over and over, entertainment. So how come Stewart acted as if it was?
Since I first saw his show, I’ve had little use for Stewart and his smarmy self-importance. He can attack and ridicule and claim it’s just comedy, and then when he gets serious, we’re supposed to believe that he is handing down truth from on high. (Alas, some fools seem to believe that that’s what they get when they watch his show.)

This is a man who is no different from any other demagogue, whether Huey Long, Elliot Spitzer or Mike Huckabee. He will clearly will say or do anything to get ahead.

Some forty years ago, my mom was suspicious of a Republican candidate who espoused centrist views similar to her own, but seemed lacking in personal integrity. She called him “Tricky Dick,” and a few years later her intuition was proven correct.

Stewart is just a modern spin of the political pundit who fancies himself a kingmaker. The false accusations of “muckraker” Drew Pearson destroyed Preston Tucker and his innovative car company, and who knows how much damage Stewart will ultimately do before he is inevitably discredited.

If someone is setting himself up as a critic of the financial media, he should be held to the same standards as any financial services representative: honesty, competency and putting the interests of his client (in this case the media consumer) ahead of his own. There is little evidence of any of these in Stewart’s performance this week, no matter how much adulation he gets from fellow travelers who share his biases or economic ignorance.


Dominie Garcia said...

great comments, joel. thanks. the hypocrisy of some folks these days who are obviously flipping their stances on government encroachment in our lives and political bailouts, earmarks and the rest, just to defend their chosen president is unbelievable to me. i am for some reason continuously astounded that people don't hear themselves as being completely hypocritical on so many issues. or, they don't care that they are and are more interested in promoting their agenda. clearly, that's always been the case with jon stewart.
- dominie

Anonymous said...

It is ironic that Jon Stewart and a comedy show instead of the regulators or news media had to bring all of this public. Also in Cramers defense he is far less guilty than most of the other financial media for their efforts together with Wall Street, the politicians & incompetent regulators for what has happened.

While I enjoy watching Cramer every night, one must remember the show is primarily entertainment. The financial networks exist to promote their advertisers financial and investment products. Who would expect them to warn about the credit bubble or coming Washington national debt collapse which will destroy much of the remaining private wealth in America today or what this will do to the dollar, the stock market, bonds, gold or the real estate market?

China is now worried about their dangerous over investment in US Treasury obligations. Washington ’s long-term choice is either repudiation or monetization. For monetization to be effective, the depreciation in the dollar would have to be substantial and this in turn would dramatically raise prices of imports for American consumers which would mean a tremendous drop in foreign imports. Debt monetization would cause more disruption to exporting nations than selective repudiation of Treasury debt.

The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See:


Ron with 30 plus years in the investment business and banking industry.

Simon said...

Ron's first point is I think exactly right; in fact this was what Stewart himself said in his interview.

Joel West said...

Bring all of what public? That Cramer and other financial media were bullish and turned out to be wrong?

Did anyone not realize in October, November, December, January or February that buying stocks last year was a bad idea?