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Financial pornography

Why you should read financial advice columns with a critical eye.

While I was standing in line waiting to board a flight to Cape Town early in the morning last week, I was approached by an elderly lady who asked for my help. Her eyes were wide and her voice was cracking with emotion, it was probably the rawness of her emotion that convinced me to step out of the queue to speak to her – her distress was palpable. She told me that she and her husband had read an investment article online that had caused a major disagreement between them. She felt that if her husband followed the opinion in the article, their capital would be eroded by inflation and they would be left financially compromised. She was in real fear for their financial security and asked me to talk some sense into her husband.

What was their fight about?

The husband had read a few articles over the last 12 months that had made him increasingly concerned about the state of his SA investments and the final straw was when he read that he should sell his investments and move to cash for a number of years. The wife had been diligently reading books on investments and commentary from people like Warren Buffett and John Bogle, who universally explained that market timing and relying on predictions was a stupid way to invest and sure to lose you money over time. After listening to their views, I was able to calm the husband down enough to postpone his decision until we could discuss this in more detail. (If you were wondering, I still made my flight to Cape Town.)

This episode caused me to revisit my role and those of other financial commentators in the media. I think there are a few talking heads in South Africa that are causing harm, they do not always realise that people make decisions based on what they hear or read.

 Why am I in the social media?

When I write articles in the media and appear on radio or TV, I try to ensure that I provide honest, objective views that are educational to those who might be following me. I believe that some of my views might run contrary to certain preconceived ideas and I try to challenge these with rational views based on respected research or my 20 years of experience advising people about their investments. I also make sure that my content never promotes my personal or business interests and will often avoid certain topics if there might be a conflict of interest. I believe that is why respected financial journalists are happy to talk to me and to publish my articles. This does not mean that my views are always going to be right but hopefully they will be rational and objective.

 There is an implicit exchange of value when I make contributions to the financial media, my views will be broadcast to a wide audience which might be positive for my business and in exchange the media house gets quality content (I hope it is quality) for free. It is always my intent that the ultimate beneficiary is the consumer who gains a greater financial perspective from our collective efforts. If contributors and the media do a good job, we hope there is a sustainable business model that will enable us all to make a living. In its best form, this is a win-win scenario for all parties.

Unfortunately, this relationship between media houses, contributors and consumers can also be manipulated by those who have a more narrow self-serving agenda.

Investors can be misled by unscrupulous operators who generate content designed to manipulate people and cause them to act in a way that can cause irreparable harm to their savings.

That is why I am careful to limit my contributions to media houses that have strong editorial policies as I believe the financial media have a duty to provide considered, objective input.

 What is going wrong?

As a consumer of financial media, I make a point of reading anything written by certain commentators because I know they have valuable, well-reasoned insights that will add to my knowledge base. I might not always agree with them but I do learn from their input. I also make a point of NOT reading other commentators because I believe they are merely trying to further their own, narrow objectives. In the 1990s, columnist Jane Bryant Quinn called this type of content, financial pornography, nowadays we might call it clickbait. In South Africa, certain media houses are happy to generate any content that will get them reads, viewers or listeners. When advertising revenues are under pressure, anything that will cause controversy or increased levels of fear is potential gold for these media houses and so their editorial policies are purposefully lax. This is one of the reasons that I no longer appear on certain TV channels, printed publications and financial websites.

Even respected publications make mistakes by publishing financial pornography from time to time. In an article written in Fortune Magazine in 1999, a Fortune journalist wrote, “Unfortunately, rational…stories don’t sell magazines, cause hits on websites, or boost Nielsen ratings”. I don’t believe this is completely true.

Moneyweb is one of the few bastions of editorial quality that I would like to be associated with. However, that does not mean that all the views from columnists published in Moneyweb should be believed as gospel. You need to interrogate why these columnists are writing articles in a particular way, do they have an agenda behind their articles? This is especially relevant with articles that are peddling fear or greed. Perhaps the key to publishing content that might cause financial harm to unsuspecting investors, is to provide an opposing view that provides both sides of the argument in one story. In summary, I suggest you read all opinions (including this one) with a critical eye and don’t make big decisions in a rush.

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Investors all over the world share the same emotions and react out of fear. I had an interesting experience a while back when a married couple came to discuss their investments with me. The husband is a local farmer and the wife is an American citizen.
The husband sold his farm because of local politics, and wants a managed private portfolio in USA-listed equity. The wife was very skeptical as she feared that a nuclear attack from North Korea wold crash the American economy.

What we should take away from this is the fact that profits are merely the remuneration for taking calculated risks. The lowest risk scenario, namely investments in interest-bearing instruments, brings about the certain loss of purchasing power.

Fear created by one-sided, ill-informed advice, motivates investors to swap an uncertain profit for a certain loss.

Emotional thinking by the couple, they are out of a farm and into overpriced US equities. Ouch.

USA equities might be expensive according many metrics.

Vanguard did an extensive analysis of valuation metrics and the returns in the stock market over the following one year and ten year periods. They back-tested the P/E and Schiller P/E with 1925 as basis year.

Over any one year period they found a zero correlation, and over the ten year period they found that in more than 60% of instances the valuation metrics could not “explain” market movements. In fact, they found a much stronger correlation between higher Debt/GDP ratios and future positive returns in the equity market. (This is of course contrary to popular belief.)

The Debt/GDP ratios in developed markets are at record highs. I believe USA equities will become more “expensive” while the profit-margins keep on surprising to the upside, improving valuations. This situation is typical of where we are in the cycle.

Do you remember how everybody said Kumba Iron Ore “offered great value” and called it a “screaming buy” when the dividend yield was 15%? That was before the share price crashed by 80% and management cancelled the dividend payout! Ouch!

Stick to your trusted and proven investment plan though, don’t mind my “irrational exuberance”.

The wisest words about investments and brokers come from the movie “The wolf of Wall street”:
Jordan Belfort: I gotta say, I’m incredibly excited to be a part of your firm. I mean…the clients you have are absolutely…
Mark Hanna: F*ck the clients. Your only responsibility is to put meat on the table.
Mark Hanna: The name of the game, is to move the money from your client’s pocket into your pocket. The number one rule of Wall Street is nobody, I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet, nobody, knows if a stock is gonna go up, down, sideways or in f*cking circles, least of all stock brokers, right?
Mark Hanna: It’s all a fugazi. Do you know what fugazi is?
Jordan Belfort: Fugazi, it’s a fake…It’s not f*cking real.

I pretty sure we all know one columnist here that fits the bit perfectly, a certain MH.

But don’t worry Mr Warren Ingram, in the comments the majority of the regular commentators will point of flaws of thinking and process and make sure the views expressed don’t go uncontested.

I will always contest views put up, by that columnist, that index funds are somehow inferior (they aren’t, they are the mathematic middle ground between the losers and the winners, the more investors go to the winning asset managers, the more an index will be the median of the winners.

I agree I have watched 20 years of people “sellers” saying to potential clients “Don’t you want your child to go to a good school?” “Don’t you want to retire wealthy?” “If you die now your family will not have enough to maintain your standard of living, you don’t want that, do you?”
So whilst you are paying R 8,000 – R 18,000 in interest on your house A MONTH here’s a pittance in interest on your new investment.
Paying off your house early could be the 2nd best investment you make!!

Yes, but people have this upgrade mentality. So when the house is paid off, they will upgrade and take out the maximum bond amount the banks will give them. People hate having money left over at the end of the month. They will always find ways to spend it all. Sad but true.

Best is to do your own homework and make your own decisions,and take other peoples advice only as a guidance.Only you yourself really knows your goals.Stick to what you as an individual want.

Best comment of the lot. Thanks!

I am almost certain that the couple read Mr Heystek’s opinion piece from the other day… I mentioned there that he gave what could be perceived as advice. Although I respect his opinion, I agree with Warren that an article like that might need a counter-article to balance the opinions.

just the other day a journalist said”warren buffet is a f….ing liar” stating that he buys and sells stocks regularly, while telling investors to buy and hold.
he just sold some Ibm and conveniently tells the market after the sale
DO’NT TRUST ANYBODY

This article is a load of crock and a set-up job. If you claim NOT to read certain columnists how then are you in a position to know what they write?
Or is it that the views expressed in these articles have been more accurate and helpful than your own “alles sal regkom” sanitized columns?

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