Question the Sources
The business of financial news is exactly that: a business. Many of the companies that provide financial news are publicly held companies that are beholden to their shareholders to make a profit. Even if you pay for the information via a subscription, these sources sell advertising space in the same effort to make a profit. This makes the financial media industry just like any other industry answering to shareholders, advertisers and readers.
Question the Authors
One of the ways to qualify a news topic on TV, in print or on the internet, is to take a look at the author. If the information consists of straight facts like the close of the markets or what the Federal Reserve Board (FRB) decided to do at its last meeting, you are probably getting hard news. If the information includes any type of opinion or forecast or makes generalizations about the markets or the economy in general, take a look at the author and his or her qualifications and past reports, especially if you plan on taking some action based on the information. Most importantly, look for conflicts of interest, especially if the writer is presenting opinions or forecasts. It's in the best interest of economists, strategists and representatives of financial services firms to promote good feelings about the markets because investors' moods can have significant impacts on market direction.
Dissemination and Speed
While there is no direct connection between the speed at which information is disseminated and volatility in the stock market, it is possible that the two are correlated. Figure 1 shows the number of days in which the daily S&P 500 volatility exceeded 2% after the Great Depression era. It did not rise significantly again until the late 1990s, a period that coincides with some significant changes in the investment market, including an increase in information available from TV and the internet. (For more on this subject, read Volatility's Impact On Market Returns and Tips For Investors In Volatile Markets.)
Figure 1
Source: http://www.schwab.com
Where to Turn for News
Finding straightforward information is a process of screening the available sources and choosing the right source for the information you need. For daily news, stick to the facts and try not to dwell on the latest prognosticators being interviewed on the floor of the stock exchange. They are usually just providing their opinion on what to buy or sell for the day and unless you are an active trader, this information is not helpful for long-term investing. For economic forecasting, look for industry leaders that stick to longer-term forecasts based on hard data and time-tested tools; there is a considerable amount of speculation built into short-term forecasting. Try to block out the hype on the internet. It's very easy to chase the latest hot stock or fund based on the most recent advertising, but this isn't a smart investment strategy.
Conclusion
As we advance in our information-rich environment, it is important to take a hard look at the information available to determine the best sources upon which to base long-term decisions. A good rule is to avoid sources that seem more like entertainment and hype and focus on factual reports. Choose your sources based on the type of information they provide and the qualifications of the provider and try to avoid any with conflicts of interest. Stick to sources that have future investment horizons beyond just the following week. Most importantly, seek out multiple sources and use your own judgment before making investment decisions.
by Michael Schmidt
Michael Schmidt, CFA earned an MBA from Loyola University of Chicago and is a Chartered Financial Analyst. Mr. Schmidt contributes to the CFA Institute as part of the Educational Advisory Board helping shape future CFA exams and has been part of the annual grading team since 2001. He has spent 20 years working for management and consulting fields, such as William M. Mercer, INDATA and Coastal Asset Management. His roles there included asset allocation and integration of pension investment assets. As an analyst at Mellon Bank, Northern Trust and Evergreen, he provided buy side research while publishing reports on various buy side sites like Dutton, Investrend and InvestSource. He has also managed investment portfolios for the institutional and the ultra high-net-worth arena with specialties in value and quantitative equity styles and multiple fixed income strategies. Mr. Schmidt is currently working for the NASD (now FINRA) Dispute Resolution Board as an arbitrator, chairperson and professional mediator. He has also testified as an expert witness for claimants/plaintiffs and respondents/defendants. Mr. Schmidt also consults to the website Invest Safe as an expert witness.
