MorningWord 1/7/16: These Aren’t the Pundits You’re Looking For

by Dan January 7, 2016 10:04 am • Commentary

Regular readers know that I became a market commentator accidentally. When I got a call in the fall of 2008, (as the financial world as we know it generally, and the firm that I worked for specifically, almost went under) inquiring whether or not I would be interested in trying out for a show about options trading on CNBC, I said why the hell not?

I went to CNBC’s headquarters to do a screen test. I walked into a green room full of potential market pundits. It reminded me of the Mos Eisley Cantina from the original Star Wars, not exactly the sort of cats I’d want to kick back with and have a few brews.

But here I am more than 7 years later. Not only do I make frequent appearances on CNBC, I write thousands a words a week on RiskReversal, TickerDistrict and at 140 characters a chop on Twitter that represent my opinions on financial markets. My main goal is to help individual investors understand how to manage their risk in the markets. That can be through the use of options, or simply opinions on the inherent risk in a stock or any directional position, especially when levels of complacency get to the point where you just feel it in your plums that something bad is coming right around the corner. But that’s the point I want stress, a lot of what I do is education, but much is merely opinions, not recommendations, not strong suggestions, but opinions. I am not viewers/reader’s paid wealth manager or broker. When I’m asked to talk about a stock or a sector or a market, I can provide what I think are well thought out opinions, offer non-consensus, and often unpopular view of what could go wrong, but more importantly offer views on how one can reduce your risk, or detail strategies that help position an investor to sleep better in uncertain times, or merely add yield to existing holdings in a difficult return environment.  You get the point.

But no one actually knows where a stock or the market is going to go over any given time. We can have opinions based on experience and all of our possible inputs, but they’re not always going to be right.  Matthew McConaughey’s character in The Wolf Of Wall Street hits this very nail on the head, suggesting that “nobody knows….I don’t care if you are Warren Buffett or even Jimmy Buffett, nobody knows if a stock is going up, down, sideways, or in circles”.

Think of that side of market punditry the way you would your NFL Today analyst shaping your opinions for your Fantasy picks. The information could be valuable, or it could be useless, but ultimately you have to be the one making the picks.

As a professional growing up in the business, like you, I routinely sought out opinions from all different sources, print, tv, brokerage firms, buy-side peers, taxi drivers, the web etc etc. It’s all valuable in it’s own way as long as you know how to sort and filter it. One thing I learned fairly quickly though, is that news is news and it should not be biased, and when it is, your antennas should go up. The Wall Street Journal, New York Times Business Section and the FT, outside their clearly labeled opinion pages should be unbiased. Which is why yesterday I was dumbfounded to see three journalists defending Apple (AAPL) stock in the face of its recent decline:

And this:

And there was a guy (who I like) on CNBC yesterday, who is NOT a financial analyst (not even in financial journalism) suggesting that AAPL’s valuation, the company’s product line-up and balance sheet make the stock a no-brainer at current levels. These are not market professionals, they cover market professionals. Its hard enough for trained financial professionals to beat the market, good luck taking financial advice from a financial journalist.

Which brings me back to the weird animal that is the financial pundit and getting a sense for why they even put their opinions out there? Usually it has to do with financial incentives, marketing, sometimes ego. But hopefully there is a sincere effort to add opinions that are the result of thorough and thoughtful analysis and relayed through intelligent dialogue. I do find that for the most case these pundits really care about their readers and viewers. And feel remorse when an opinion turns out to be wrong.

But that doesn’t mean punditry itself doesn’t suffer from biases you need to be aware of. My views of most financial punditry is that it suffers from the overriding desire for most in the capital markets to have the price of risk assets go up.  Therefore, the consensus is often geared to that notion. Mathematically, that’s the proper sentiment as history shows us, risk asserts generally go up over time.  From the yesterday via Goldman Sachs Asset Management, it’s 2-1:

But what happens often, and it has been fairly pronounced in the most recent bull market, is you get periods where you run out of things to talk about because stocks just keep going higher from already high levels. That’s where mantra’s like Don’t Fight the Fed start to trump mundane things like organic earnings and sales growth, healthy levels of inflation and normalized interest rates. That sentiment can make it hard to separate the forest from the trees and settles way too many people into unhealthy levels of complacency. Both pundits and investors.

The more than 200% gains of the S&P 500 from the March 2009 lows to the recent highs corresponded with a massive secular shift in how media of all kinds are disseminated, and resulted in the sort of democratization of information not seen since the explosion of the internet in the 1990s.  The proliferation of mobile devices, social media platforms and micro-blogging / messaging has created a situation in the financial markets where there is a lot of noise.

It ain’t hard these days to have a digital bull horn and become a financial pundit, but it is important for the investing public to have a sense for what exactly are the incentives of those on tv or the web shouting at you.  Starting out in 2009 I had no incentive other than the challenge to see if I could be successful articulating my views on TV. Once I got my arms around it, I decided that in some ways I would be the anti-pundit and do my best to attempt to pick apart the consensus when I could. Again, back to incentives, I was not managing other peoples’ money, I was not seeking to raise assets, frankly I wasn’t selling anything. Eventually in 2011 we launched as a way to offer greater detail and transparency to what I was opining on TV, and hopefully a way for people to educate themselves on the alternative ways investors can express their views in the markets, with a strong bent towards risk management. We quickly recognized there was a subset of viewers who wanted more and were willing to pay for it.  There you go, I have an incentive, but I try to be very transparent about my own biases (which clearly exist). I sell education, not financial products. So I will never be a risk asset cheerleader because it is the path of least resistance or because economic incentives dictate it.