The Media: Friend or Foe?

The media can be a major detriment to your investment success. Every day investors are inundated with all the latest news from fast talking commentators like Jim Cramer and major financial magazines such as Fortune and BusinessWeek. Unfortunately, listening to what these sources have to say and adopting their recommendations could have a damaging effect to your long term wealth.

Only days prior to news of Bear Stearns being bought out by J.P. Morgan, Jim Cramer, host of CNBC’s “Mad Money” and perhaps the most visible stock picking “expert” in the country, advised his listeners by proclaiming on his show, “Bear Stearns is fine!” A week later, Bear Stearns stock dropped by a whopping 90%! and we all know what happened next. A statistical analysis indicated that Cramer’s advice did not beat the market and added no extra value for investors. There was no evidence of amazing stock picking skills. It appears that the only value that Mr. Cramer added was entertainment!

History offers several examples of the media saying one thing, and the complete opposite happening. On August 13th, 1979, BusinessWeek declared on its front page that it was “The Death of Equities”, further saying, “The old rules no longer apply—the U.S. economy probably has to regard the death of equities as a near-permanent condition.” At that time the Dow Jones was sitting at 875.30. As of January 26th, 2015, the Dow Jones is perched at 17,666.63, a total return of 1,918%!

Throughout the 1980’s the world was led to believe that Japan would soon challenge the United States for economic supremacy. In September of 1989, this notion prompted Fortune to run on its cover that Japan was, “A techno-scientific culture like we’ve never seen before on the face of the earth.” From the day that article was written to December 31st, 2002 the Nikkei 225 Index lost 75.46% of its value, while the Dow returned 213.69%. Looks like the media jumped the gun again on this one.

These lessons go to show that much of what the media spouts can be misleading—although you don’t need me to tell you that. The best way to build your long term wealth while keeping risk at a minimum is to globally diversify across all of the different asset classes, rather than acting on every day media hysteria.