This Reporter Says: Buy Stocks Now!

Why you shouldn't listen to the media when it comes to markets, the economy or anything.
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Let's be clear right from the outset: If you've made even one investment decision based on the content appearing here at dealbreaker dot com, you're doing things catastrophically wrong. But we are reporters here, and financial markets are ostensibly our purview, so this item from the FT piqued our interest: “Why market reporters lean towards negative news.” As the FT's John Authers explains:

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The way that markets are reported affects the way they are perceived, and the way that investors behave. So can the way journalists report the markets be measured? Are we doing a good job?

Historically, it appears that we are not. This week, Diego Garcia of the University of Colorado at Boulder presented a paper to a conference on journalism and markets at Columbia Business School. Entitled The Kinks of Financial Journalism, it shows that journalists are biased — collectively we are more negative about market falls than positive about market rises.

The paper examines the relationship of stock movements from 1905 to 2005 versus how the media reported on them by measuring the sentiment of articles at the New York Times and Wall Street Journal. A naive model would assume that big gains produce celebratory language while big losses makes for darker verbiage. Unsurprisingly, the study found this to be broadly true. But the relationship isn't consistent: Market reporters are gloomier about down days than they are cheery about up days. In other words, we focus too much on the bad.

As the paper's author writes, the findings are “inconsistent with models where information flows in a continuous manner from fundamentals to the printed page,” which is odd, given that not a single journalist since the dawn of written language has ever been accused of faithfully transmitting information.

Anyway, here's a chart. It shows how scribblers at the Grey Lady and WSJ are roughly twice as sensitive to down days as they are up days, in terms of tone.

Diego Garcia, University of Colorado at Boulder

(Diego Garcia, University of Colorado at Boulder)

There are all sorts of explanations we could bring to bear here. For Garcia (and Authers), Daniel Kahneman's prospect theory applies. Losses hit us harder than winnings. Realizing you dropped a $10 bill affects you more than finding a $10 bill.

That doesn't seem wrong, per se, but the explanation might be simpler: Good news is boring. You don't read about the planes that land safely. It's only natural that reporters make more hay out of bearish days than bullish. There's also the fact that stocks tend to go up, not down. If gains are more common than losses (and they are), stories about stocks rising are not going to be all that enthralling.

FT's Authers takes the opportunity to stare at his navel and reflect on his own admittedly downbeat cast, which he justifies by noting how he was “correctly bearish ahead of the disasters of 2008.” That's a bit of a non sequitur, though. The paper examines media sentiment as it relates to past, not future, returns. One might assume that the way journalists report on market movements carries implications for what investors should do, but that's not exactly the point.

Still, we here at Dealbreaker can cop to inveterate pessimism. There's no doubt we're guilty of whatever effect the scholar has described here. So to ameliorate our past bias, let's state for the record right here and now that what you should do in regards to stocks is buy them. All of them, all the time, beginning right now. Everything is good! Buy buy buy.

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Postscript: If you're curious, here's the first NYT story mentioning “stock market” from the study's sample, appearing on New Year's Day, 1905, on page 13. It's a mystery how the algorithm that parsed language sentiment for the study dealt with sentences like “The fact that last Spring even those not given to be overmuch impressed by the happenings of the moment were saying that a market anything like that of three years ago was not to be looked for again perhaps in a decade, renders all the more extraordinary the record of net gains that is shown by the price of nearly every active stock traded in on [sic ?] the Stock Exchange.”

New York Times

New York Times

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