CNBC Is Hurting Investors With All That Squawking

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Before you go close icon"Street Signs" hosts Mandy Drury and Brian Sullivan
It's ironic that CNBC considers itself must-watch TV for investors. The reality is that its programs consist primarily of "financial news" you should ignore. With the rare exception, following the stock picking and market-timing advice featured on CNBC is neither a responsible nor intelligent way to invest. If you find the antics of Jim Cramer or the mindless musings of Art Cashin entertaining, then don't let me deter you. But don't be deluded into thinking you're receiving sound, data-based advice.

To avoid any charge that I am cherry picking in my use of examples, I looked at CNBC's entire lineup for Monday, Oct. 6, which is the date I wrote this blog post. Here's a review of some programs, together with my comments on why they are basically useless to investors.

Speculation on Stocks That Might Split in the Future

Following the announcement by Hewlett-Packard (HPQ) that it will split the company into two parts, CNBC's Dominic Chu speculated about what companies might perform spin offs next. The subject of this piece is based on a number of flawed premises.
  • The first is that Chu has some insight into the future, and that his "insight" should be given greater weight than others. I am aware of no such evidence. All of the information discussed by Chu is in the public record. Millions of traders are looking at it every day. Presumably, the prices of companies the market believes are about to split have already been adjusted for this contingency.
  • The second is that spin-offs are always a positive development for investors. There is data indicating that investing in the parent company after a spin-off produces better returns than their benchmarks, but the improvements are "economically insignificant." (In other words, the average difference is so marginal, you'll barely notice it in your portfolio.) By contrast, investing in subsidiary companies after a spin-off at the initial listing date has yielded results that consistently outperformed the market.
What Clients Are Looking for in the Markets

Colbert Narcisse, of Morgan Stanley Wealth Management, discussed what his clients are looking for in the markets and explained "the best alternative asset strategies." I find it interesting that CNBC interviewed him (and others) at the Celebrity Golf Classic at the Liberty National Golf Club. It reminded me of Fred Schwed's classic book, "Where Are the Customers' Yachts?" I didn't see any interviews of investors attending this golfing event.

CNBC derives significant advertising revenue from the securities industry. By featuring representatives of large brokerage firms, CNBC is acting in its own economic interest.

I don't understand why retail investors care what Morgan Stanley's clients are looking for in the markets now. Investors should be even less interested in "the best alternative asset strategies," which seems like an oxymoron.

I would like Narcisse to explain why anyone should use a brokerage firm that recommends actively managed funds and alternative asset strategies, given the dismal track record of both these investments. But don't hold your breath waiting for CNBC to press Morgan Stanley (or any other brokerage firm) on these issues.

Making Sense of Random Events

"Street Signs" featured nonsensical "explanations" by "market pros" musing about what happened in the markets today and pontificating about the future.

While I'm sure it's good for the egos of such "market pros" to appear on television and give their spin on the stock market events of the day, their speculations are likely to be no more accurate than yours. The reality is that the stock market is random and unpredictable. It's useless to try to make sense out of random events. Don't waste your time watching others try to do it.

Conspicuously missing from the softball questions posed to these guests is any discussion of the accuracy of their past predictions, or any reason why investors should take their market commentary seriously.

Sector Picking

Another segment discussed "top picks in solar" energy. The discussion included the growth and cost of solar technologies.

Discussions of particular sectors may lead investors to over-concentrate in one industry in the belief (or hope) that it will outperform others. I am unaware of any credible data indicating anyone has the expertise to select outperforming sectors. Instead, investors would be better advised to include all sectors in a globally diversified portfolio.

The overriding majority of CNBC's programming represents an attempt to identify mispricing in securities. The stream of guests relies primarily on forecasting, security selection and market timing. Even the most cursory review of the data indicates that these are failed strategies. For the 10 years ending Dec. 31, 2013, only 19 percent of mutual funds survived and beat their index. Only 15 percent of bond mutual funds did the same. Do you really think these "pros" are sharing actionable information that is unknown to these fund managers?

%VIRTUAL-pullquote-There are many subjects that would actually add value to investors. %In truth, the information CNBC guests are so readily disseminating has already been incorporated into security prices by millions of buyers and sellers. The real reason for their appearance is to establish credibility with naive investors in the hope of increasing asset flow to their respective firms.

There are many subjects that would actually add value to investors. These include the importance of asset allocation, the benefits of keeping fees and expenses low, how diversification affects risk, and how to structure a portfolio to achieve maximum expected returns for the amount of risk taken. Unfortunately, discussing these subjects is unlikely to drive viewers into the arms of brokers, who profit handsomely from selling actively managed funds, alternative investments or other strategies that have precious little data to recommend them.

In a prior blog discussing Cramer's terrible advice, I raised an important ethical issue. At what point does financial journalism cross the ethical line? If a network knows the advice it is presenting is more likely to harm than to help viewers, does it have an ethical obligation to at least alert viewers to that fact? I believe they do. What do you think?


Daniel Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."
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