I first thought I'd title this article Financial News: For Entertainment Only, but then as I thought more about it, I concluded that for most investors, watching or listening to financial news is probably not that entertaining, and more likely is detrimental to their investment success. If the news is pessimistic, it probably will cause you to worry about your investments, and worst of all, change your rational investment strategy. If the news is optimistic, it may cause you to be somewhat greedy, and again, change your rational investment strategy (in a different way of course). As Warren Buffet said, as an investor, you're better off being fearful when others are greedy and greedy when others are fearful; here's the exact quote from his 2004 letter to stockholders: "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."
So, if you have the discipline and mental fortitude to do the opposite of what the financial news makes you feel like doing, then perhaps it could be useful to you.
Behavioral Finance and Neuroeconomics are fields of academic research on investing that address topics like the one discussed above. If you want to learn more about how your brain is wired to make bad financial decisions (and how you can combat it), I recommend that you read Jason Zweig's excellent book, Your Money and Your Brain (Learn How the New Science of Neuroeconomics can Help Make You Rich).
Another result of academic research on investing that tells us that we shouldn't pay much attention to financial news is the Efficient Market Hypothesis (EMH). In its simplest form, it states that all known information is already reflected in market prices (e.g., stock prices). While there have been criticisms of this theory, if we reflect on it a bit, I think we can conclude that it's unlikely there's anything in the financial news (widely known information) that can help us make investment decisions. As soon as any financial news is disseminated, thousands of very intelligent, professional investors and traders know about it, and have the opportunity to instantly buy or sell stocks or other investments based on their analysis of the news. Do we really think that we are somehow smarter than all of these highly skilled traders and investors, and can somehow take advantage of the news in a way that they haven't already? Consider that for every expert or investor that is predicting doom and gloom, and selling stocks, there's another expert or investor on the other side of the trade, buying the same stocks.
Let's look at a current example: the U.S. budget deficit and debt.
Although I pay almost no attention to financial news (I used to, before I learned that it was bad for me), I do glance at MarketMinder.com now and then, and I hear things from people who are worried about this or that thing they've heard in the news. A big one now is the large and growing U.S. budget deficit and debt (the trade deficit is another one that people have been worried about for years). There are all kinds of worries about how this will be bad for stocks (e.g., it will lead to high inflation, which will be bad for stocks). Don't you think that most investors already know about the deficits, and are investing accordingly? I'm not saying that deficits definitely won't cause problems down the road, but just that we don't know that for certain (financial history actually indicates otherwise), and that it's unlikely that we can take advantage of this already widely know information to make investment decisions.
Although it's somewhat of a tangent, here are a few things to consider about the budget deficit and debt. First, it's not the absolute size of the deficit or debt that matters, but its size relative to GDP, and the ability of the government to service the debt. Yes, the relative size of the debt is large and growing, but it's not as large as it was in the mid 1940s, yet this period was followed by robust economic and stock market growth. Also, since bond rates are historically low, it's less expensive for the government to pay interest on new debt.
Historically, large and increasing relative debt does not result in lower stock prices. Debt as a percentage of GDP increased from 32.6% in 1980 to to 67.2% in 1995, and was at 61.5% in 1999, yet this was the time of the greatest stock bull market in modern history. In 1970 the debt was only 35.7% of GDP, and decreased to 31.7% in 1974, yet the U.S. stock market (as measured by the S&P 500) lost about 25% during this period. There are numerous similar examples for both the U.S. and other countries that show that, if anything, increasing government debt is correlated with higher stock prices, and vice versa -- exactly the opposite of what most people seem to believe.
This has been somewhat of a digression from the topic of financial news, but the point is that as an investor, your time is better spent educating yourself on financial and investing history than watching or reading financial news. To educate yourself more on debt and deficits as they relate to investing, visit MarketMinder.com, and click on Deficits in the TOPICS section on the right of the page (make sure you're on the AT A GLANCE tab).
Another thing to consider about financial news (or any news for that matter), is that the new media's interests are not aligned with your interests as an investor. The media is in business to make money, not to educate you. Dramatic headlines capture attention, leading you to read the associated article, and be exposed to the associated advertising.
In most of the investing books on my recommended reading list, you'll find a section or chapter illustrating the hazards of paying attention to financial news and the predictions of experts. Extensive research has shown that investors do not profit from responding to financial news or following the advice of experts. In trying to keep this blog relatively simple, I don't provide lots of references, but the books I recommend do. Rather than spending time watching or reading the financial news, I highly recommend that you spend that time reading a good book to educate yourself on the theory, history, psychology and business of investing. In doing so, you'll become a better investor, and experience fewer emotional extremes.
However, if you actually find financial news entertaining or interesting, and don't let it worry you, excite you, or influence your investing behavior, then by all means, enjoy it!