Ever wonder what motivates various pundits, strategists and fund managers to spout off about whatever it is they are yammering on about?
Step back and examine all of the various words spilled on markets. Scratch a little beneath the surface, and you quickly realize that not all participants are in a relentless search for the truth.
A few years ago, I noted that good investors have to wear many hats: One part historian, one part mathematician, one part psychiatrist, one part accountant and one part trial lawyer.
When it comes to market commentary, that last one can be especially helpful. Putting a witness’s motivations into broader context can often shed some light on their position. Why did they say that? What incentives might they have? What are they subconsciously rationalizing?
As I have noted before:
Good litigators are always skeptical, but not negative. Is that witness telling the truth? What is motivating him? Is the opposing counsel’s argument logical? Being able to answer these questions makes for a good lawyer — and a good investor. When it comes to investing, everyone is trying to separate you from your money. Good investing requires good judgment. Being able to recognize valuable intel vs. the usual blather is a huge advantage.
So let’s play a game of cross-examining attorney.
Before I start dissecting and attacking other peoples’ motivations, let’s consider two of my biases. First, I publish on Bloomberg daily — it’s a sweet gig, so I want to keep it. That means I want to write insightful things that get read on the Bloomberg terminal and generate clicks on the website. This creates an incentive for me to write things that are both clever and a little controversial. If they are a little different from the usual fare, that probably will garner more reads, too. Additionally, I am a partner in a wealth-management firm, where I oversees an asset-allocation model. That motivates me to want to look smart and rational and trustworthy in order to attract more assets. Where I sit probably accounts for my skepticism of high fees and commission-driven investing.
Those are my obvious biases. What about the rest of the commentariat? Consider the following people’s incentives and biases:
• Bulls and bears: This is the simplest breakdown of market participants. Speak to people about their investment posture and you learn their outlook is usually determined by their most recent activity. Someone who just bought stocks is bullish on the markets; someone who just sold is bearish.
• Mutual-fund managers: Obviously, they want to run your money. They appear in the press to make the case that their stock picking and/or market timing skills are superior to a simple and cheap index. Therefore you should give them your investing/retirement cash. Although the academic literature on this approach is pretty damning, enough managers outperform the benchmarks each year to keep many people interested.
• Hedge-fund managers: These folks charge so much more than mutual-fund managers, that market-beating returns are even harder to come by. They end up selling a variety of things beyond mere outperformance. Behavioral finance professor Meir Statman observes that “investments express parts of our identity.” Savvy fund marketers know this, and thus they sell access to hedge-fund managers, along with status, prestige and astuteness.
• Analysts and strategists: They want you to follow their stock and/or market calls. If you would also vote for me in the Institutional Investor rankings, send some trades to my desk, and perhaps consider us for your next syndicate or banking deal, it would be greatly appreciated.
• TV producers: The only thing that matters to them is ratings. They gin up artificial conflicts; create a sense of urgency for even the most minor of economic data points. The focus is on the stock you must own NOW! I know, it’s hard to believe, but what you see on financial TV may not be motivated by what’s best for your 401(k).
• Gloom and doomers: A variety of websites, newsletter writers and pundits have been forecasting a terrible crisis — and have been for some time now. The Federal Reserve has run amok, we are running out of food, fiat currency is worthless, another 1987 crash is just days away, the whole system is going to collapse. You must own physical gold! Let me remind you that betting on the end of the world has never paid off yet, and when it finally does, who are you going to collect from?
• Gold bugs: My favorite factoid often forgotten by more recent gold buyers is that the SPDR Gold Shares, an exchange traded fund, was the brainchild of the World Gold Council. This is an organization created by global mining companies for the sole purpose of promoting the sale of gold. This ETF was created to try to end to end two decades of low gold prices and a supply glut.
There are lots of other commentators in the market who want your time, attention and money. Chief executives want you to buy their company’s products as well as their stock; newsletter writers want your subscription dollars. Journalists want you to read their work (and tweet them, please). Headline writers want you to click on the article. Regulators want their budgets maintained or even raised. Politicians want to be re-elected.
Like a good trial lawyer, you must always question the obvious, and consider alternative explanations for what you read and hear. You can’t blindly accept everything you hear as truth, nor can you cynically reject everything. Being able to discern between what is valuable and who is truthful is a critical skill for investors.
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management, an asset management and financial planning firm. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.