Meditations on Money Management

Andrew Silton: Seeking good investing advice? Turn off the TV

CorrespondentMay 17, 2014 

Many active investors think that they need to be watching CNBC or Fox Business in order to be fully informed. After all, if you step into the trading room of any investment bank or hedge fund, you’ll see Jim Cramer’s or Stuart Varney’s face on strategically placed high-definition screens. Wall Street provides a huge hint about the value of those business channels by turning off the sound. In this column, I want to address a common question: What should I be reading or watching in order to be a knowledgeable investor?

Keeping a clear mind is the best thing you can do. This means that you should avoid watching business news shows. The hosts, analysts, and guests on these channels spend almost all their time engaging in speculation about the latest meaningless blip in stock or bond prices. On occasion, a mutual fund manager will dole out a specific recommendation. Do you really think he is going on television to give valuable free advice? More likely he is hoping you’ll help drive up the price of a stock he already owns. So why does Wall Street watch these shows? Entertainment. Every once in a while, traders will turn on the sound because somebody is yelling on a business channel.

If you have 55 minutes to spare, I can save you hours of watching boring television by recommending three classic financial rants that are readily available on YouTube. One classic from early 2009 involves Rick Santelli, a CNBC reporter, fuming about affordable housing programs. Mr. Santelli gets credit for launching the tea party movement. If you prefer heated debates, there’s Carl Icahn and William Ackman in 2013 trading insults instead of discussing the investment prospects of Herbalife. Finally, I recommend the fiery exchange between Brad Katsuyama and William O’Brien over high frequency trading, which aired about six weeks ago. Katsuyama is the hero in Michael Lewis’ latest book, and O’Brien is the president of BATS Global, a high frequency trader. Lewis appeared in the segment but didn’t get much of a chance to talk about his book.

Wall Street missives

What about newspapers and financial websites? Shouldn’t the educated investor have more than a passing familiarity with the contents of The Wall Street Journal, Barron’s, or Bloomberg News? Until I retired, I never perused any of these publications. Now that I write on a regular basis, I spend hours reading these types of publications to try to figure out how Wall Street is trying to lead the public astray. I’m not suggesting that you shouldn’t read business publications. Much like their colleagues in politics, the arts, or international affairs, business reporters have much to offer, but it isn’t advice about how to manage your financial affairs.

If the media have little to offer, you are probably starting to worry that I am going to recommend that you study lengthy reports produced by Wall Street analysts. While business television can sometimes be mildly amusing, and newspapers can be generally informative, Wall Street research offers virtually no value. If you are dead set on learning the ins and outs of the automobile industry or technology sector, you might be able to find a fairly well-written piece of research. However, if it’s investment advice and stock recommendations that you’re after, you can safely ignore Wall Street, because there’s nothing of proprietary value contained in their missives. By the time a research report makes it on to your broker’s desk or your email inbox, a high frequency trader has exploited any possible financial nugget.

Basics are free

Since research reports take a long time to read and offer little value, some investment professionals offer an easy alternative: analyzing investment charts. Wouldn’t it be nice if you could study the historic prices and volume of individual securities and markets in order to figure out what to buy and sell? There’s a whole industry set up to offer you all sorts of tools to read charts. You’ve no doubt seen television commercials offering you a screen-full of flashing indicators, moving averages, and super-imposed trend lines. You are probably acquainted with a neighbor who claims that he spends his evenings using one of these systems to make money trading the market. High frequency traders rely on folks like your neighbor, much like Jon Stewart relies on politicians to make gaffes.

Are you thinking you need to get far more serious in order to be a good investor? My bookshelves are weighed down with lengthy tomes on investments, securities valuation, and asset allocation. I suppose you could spend your evenings and weekends poring through classics such as “Financial Statement Analysis and Security Valuation” or “Security Analysis: Sixth Edition.” Generations of investment professionals have read these books on the way to earning a Master’s in Business Administration and a certification as a Chartered Financial Analyst, and yet they’ve largely failed at adding value for their investors and clients.

Amazingly, the basics of investing are available for free. You don’t have to do business with Vanguard, Fidelity, or Schwab to find good information on investing. Spend any time on their websites, and you will discover useful bite-sized material on all the critical aspects of investing.

Here’s one more piece of highly useful free material. William J. Bernstein, a very fine money manager and author, has just released a 14-page pamphlet titled “If You Can” on his website ($0.90 at Amazon.com). The pamphlet is a bit depressing for us baby boomers, because we’ve waited too long to follow Bernstein’s most important recommendation: Save!

Recommended reading

While the “how-to” of investing is largely available for free, the educated investor should have some context about the workings of the financial markets and their history. Looking through my library, I identified six books that have served me well and would set you back no more than $70. For starters, you might consider “A Random Walk Down Wall Street” by Burton Malkiel, “The Investor’s Manifesto” by the aforementioned William J. Bernstein, and “The Little Book of Common Sense Investing” by John C. Bogle. In fact, any book by one of these three authors on investing is worth reading.

The credit crisis is too recent, so there’s yet to be a book that offers the appropriate historical context. However, there are three books that offer important lessons about investing and financial markets: “The Crash of 1929” by John Kenneth Galbraith, “The Lords of Finance: The Bankers Who Broker the Work” by Liaquet Ahamed, and “Manias, Panics and Crashes: A History of Financial Crises” by Charles P. Kindleberger.

Reading these volumes won’t make you wealthy. However, they will help you become a good long-term investor, which should enable you to earn reasonable returns while understanding the risks. Meanwhile you can turn off the television, set aside that pile of financial literature, and enjoy spring.

Andrew Silton’s Meditations on Money columns can be found twice a month in The N&O’s Work&Money section. He is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog http://meditationonmoneymanagement.blogspot.com/

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