Financial Punditry Should Be Taken with a Gigantic Grain of Salt

Guest Post by Erick Haman, Fordham University School of Law JD Candidate (2015)

With Clash of the Financial Pundits, Joshua Brown and Jeff Macke tell the history of financial media and punditry while evaluating its worth looking to the future. Brown, himself a pundit on CNBC, is the creator of The Reformed Broker, one of the most widely followed financial blogs in the world. He has been named the top financial person to follow on Twitter by the Wall Street Journal, Barron’s and TIME Magazine. Macke, a professional investor and market commentator on Yahoo Finance was an original cast member on CNBC’s Fast Money and ran a hedge fund in San Francisco.

As Clash of the Financial Pundits explains, financial pundits have been around for a long time, and it doesn’t look like they are going anywhere anytime soon. The book tells the story of Roger Babson’s Black Friday speech in 1929. During that speech, for the first time, the New York Stock Exchange telegraphed Babson’s message to traders working on the floor. This was the day in 1929 where the top was put out on the market. While this was not the first time Babson had espoused these views, this time the traders decided to listen to him and took drastic action. While this decades-old example shows how powerful and potentially dangerous pundits can be, Brown does believe that financial pundits can provide value as well.

In a recent interview with National Public Radio, Brown explained that “the value of punditry … is that there are really smart people that can educate you about what’s happening in the market. The danger is when you take that to the next step and you decide that something might be actionable that isn’t.”

As many critics have noted, the advice given by financial pundits does not always work out well for the viewer who makes the mistake of actually acting on the advice. Respected financial advisor and Wealth Logic founder Allan Roth analyzed the performance of several of the picks made by Mad Money’s Jim Cramer. Let’s just say the results were less than stellar.

It is important to remember that much—even most—of what these pundits say should be taken as entertainment. And just as important, he advice they give is of course not tailored to the viewers’ financial profiles or investment goals. It’s for mass consumption.

In addition, advice given by pundits like Jim Cramer can impact the price of stocks, with the impact reversing quickly, consistent with pricing pressure caused by viewers jumping on his recommendations. As explained by Moneywatch’s Larry Swedroe, “[w]hile the demand for Cramer’s stock picks increases, there is also an increase in the volume of short selling (bets that the stock will fall). In the opening minutes of the day following a recommendation, short sales increase to almost seven times their normal levels, and they remain elevated for three days. Who are these short sellers? Likely candidates are hedge funds who are exploiting naïve investors.”

These studies explain and highlight the importance of viewers being skeptical of any financial advice given by a financial pundit. As Brown explained, “[t]he way to think about financial media is the same way that you think about the weather. It’s when the storm is hitting that all of a sudden everyone is glued to Bloomberg and CNBC… [I]n the absence of those types of storms, the financial media—who want viewers, they want clicks on their sites and on their apps—they have to gin up their own emergencies.”

At The Galbraith Law Firm, we work to protect investors and assert their legal rights if they have suffered investment losses as a result of their brokerage firms’ misconduct. If you have questions regarding investment losses or the conduct of your brokerage firm, please contact a securities attorney at The Galbraith Law Firm at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.