A matter of trust

“Popping down to #guardiancoffee later on to order a ‘Toynbee’: short, rich and intensely bitter.”

–       Tweet from Robbie Collin (chief film critic, The Telegraph).

 

We have come a long way since the release of ‘All the President’s Men’. Alan J. Pakula’s 1976 thriller, about the Watergate scandal, may be the first and last film in which the real hero is an institution (The Washington Post, under its principled then executive editor, Ben Bradlee). Or for that matter, not even an institution, so much as an idea: the free press. Robert Redford and Dustin Hoffman may spend their two hours of screentime rushing about having doors slammed in their faces and meeting covert sources in sinister garages, but it’s the idea of the resolute pursuit of truth in the face of administrative obfuscation, peer group indolence, executive greed and a flurry of non-denial denials that lingers long after the titles have rolled. These days, newspapers cut out the middleman and do the bugging themselves.

The concept of a free press has not exactly thrived over subsequent years. Media groups have bulked up into ever more massive, and conflicted, conglomerates. Media channels have proliferated, creating a ‘winner takes most’ competitive environment that has dumbed down everything and crushed audience numbers for anything but the lowest common denominator pap. That catch-all culprit, ‘the Internet’, has facilitated an explosion in the number of amateur content providers that cannot but relentlessly erode the margins of paid-for publishing models. Some of this Schumpeterian creative destruction is to be welcomed. Competition always is. But from an aesthetic and cultural perspective, one is left to wonder whether some industries are better left untouched by those biting digital winds. From the perspective of quality, and in a culture in which time increasingly seems scarcer than money, one sometimes has to ask whether what is free is often far too expensive.

Felix Salmon last week issued an obituary for journalism as usual:

“Labour has almost no leverage over capital any more, which helps explain the rash of “Uber for X” start-ups: they’re nearly all based on the idea that there is a bottomless pool out there of people with smartphones willing to do just about anything (drive a car, go shopping, do laundry, clean an apartment) for $15 an hour. If a company loses one of those workers, it’s no big deal, it just replaces that person with someone else who’s just as good and just as cheap. Now just apply that model to journalists.”

Megan McArdle responded with a less than entirely convincing defence of her own chosen career. Or perhaps she was just expressing Felix Salmon’s concerns from a subtly dissimilar angle:

“..the problem is not competition for eyeballs from new outlets that are writing news in a different, fresher way. The problem is competition for ad dollars from companies that don’t produce news at all. Making news is expensive. It’s hard to compete against companies that don’t bother. Journalism’s biggest threat comes from companies like Google and Facebook that cheaply aggregate our expensive content and sell low-cost, demographically targeted ads in huge numbers. They can kill the whole business.”

Ezra Klein waded in to the debate, and was almost ridiculously upbeat by comparison.

As with so many things, it turns out that Michael Lewis got there before almost everybody:

As you walk through the front door of the Columbia School of Journalism, the first thing you see is this paragraph, cast on a bronze plaque:

“OUR REPUBLIC AND ITS PRESS WILL RISE OR FALL TOGETHER. AN ABLE, DISINTERESTED, PUBLIC-SPIRITED PRESS, WITH TRAINED INTELLIGENCE TO KNOW THE RIGHT AND COURAGE TO DO IT CAN PRESERVE THAT PUBLIC VIRTUE WITHOUT WHICH POPULAR GOVERNMENT IS A SHAM AND A MOCKERY. A CYNICAL, MERCENARY, DEMAGOGIC PRESS WILL PRODUCE IN TIME A PEOPLE AS BASE AS ITSELF. THE POWER TO MOULD THE FUTURE OF THE REPUBLIC WILL BE IN THE HANDS OF THE JOURNALISTS OF FUTURE GENERATIONS.

“..The first sentence on the bronze plaque that you see when you walk through the front door of the Columbia Journalism School may or may not be true, but it sets a fittingly autocratic, unreflective tone. The second sentence is ungrammatical. The last two sentences offer the sort of grandiose vision of journalism entertained mainly by retired journalists or those assigned to deliver speeches before handing out journalism awards. Highly flattering to all of us, of course, but it would be more true to flip the statement to read: “a cynical, mercenary, demagogic people will produce in time a press as base as itself …”

The problem with journalism isn’t just the competitive environment; the problem with journalism is journalists. But our focus here is more specifically on journalism relating to matters of finance and investment. Such journalism tends to fall into one of four categories:

 

  • The omniscient economics correspondent. Invariably a tortured authoritarian still clinging to the discredited remnants of Keynesian economic theory. “QE does work, we just haven’t done enough of it yet.”

 

  • The anti-business zealot. “Everyone should pay their fair share of taxes – especially everybody else.” These social campaigners often come from inherited wealth, and are employed by a tax-advantaged trust.

 

  • The clueless tipster. Spanish practices among the gutter press have poisoned the communal well and led to a generalised suspicion by the public that wealth management is little more than organised insider dealing.

 

 

It is not enough, and it is certainly not accurate, to say that journalists are merely commentators on financial market action. The commentator at a sports match has no ability whatsoever to affect the outcome of the game. But the financial journalist does, depending on the consumer reach of their ‘platform’.

The irony is that most investors might be better served by cutting out the commentary altogether (an irony of which we are, of course, well aware). The psychologist Paul Andreassen showed that people who receive frequent news updates on their investments earn lower returns than those who get no news. The following is from a 2002 Fast Times article:

“The barrage of information and pseudo-information has been magnified by the explosion in financial news over the past decade. In the late 1980s, psychologist Paul B. Andreassen did a series of experiments with business students at MIT that showed that more news does not necessarily translate into better information. Andreassen divided students into two groups. Each group selected a portfolio of stocks and knew enough about each stock to come up with what seemed like a fair price for it. Then Andreassen allowed one group to see only the changes in the prices of its stocks. Students in that group could buy and sell if they wanted, but all they knew was whether the price of a stock had gone up or down. The second group was allowed to see the changes in price and was also given a constant stream of financial news that supposedly explained what was happening with each stock. Surprisingly, the less-informed group did far better than the group that was given all the news.
“The reason, Andreassen suggested, was that news reports tend to overplay the importance of any particular piece of information. When a stock fell, its fall was typically portrayed as a sign that further trouble lay in wait, while a stock that was on the rise seemed to promise nothing but blue skies ahead. As a result, the students who had access to the news overreacted. Because they took each piece of information as excessively meaningful, they bought and sold far more frequently than the people who were just looking at the price.”

The consistently excellent Wall Street Journal columnist Jason Zweig says he was once asked at a journalism conference how he defined his job. His response:

“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.”

As Zweig puts it, good advice rarely changes, whereas markets change constantly. “The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”

These are desperate times for investors. Interest rates have been slashed to zero, making a surreal mockery of any sort of savings culture. In some cases they have gone below zero: Bloomberg’s Mark Gilbert points out that negative bond yields are becoming the new normal for many sovereign borrowers, with (clearly terrified) investors willing to pay for the privilege of lending their money to governments. Finland last week auctioned five year notes at minus 0.017%. At least six other countries have five year debt trading at, or below, zero.

At the same time, desperate investors have stampeded into the shares of businesses that seem ostensibly “safe”. In the process, they have bid up the prices of many of those shares to what we consider unsustainable (and probably “unsafe”) levels.

Like us, Zweig sees huge merit in the advice of the legendary value investor, Benjamin Graham:

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Another piece of Ben Graham’s advice which we feel is particularly relevant today:

“Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes – in fact very frequently – they make mistakes by buying good stocks in the upper reaches of bull markets.”

That advice could have been written for the market environment of February 2015.

Back to Jason Zweig:

“My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.”

Good luck getting an editor to endorse that message.

There is an intriguing post-script to the Watergate story that touches on the venality of human nature (and therefore, more or less directly, on the biddability of politicians). One of the participants in the decision to break into the offices of the Democratic National Committee was Jeb Stuart Magruder. On hearing that the Watergate burglars had been caught, he responded with a degree of bewilderment consistent with an FT or New York Times economics correspondent:

“How could we have been so stupid ?”

Robert Cialdini points out that the original idea for the break-in came from G. Gordon Liddy, who was in charge of intelligence-gathering for the Committee to Re-elect the President (the appropriately monickered CREEP). His proposal was expensive. It required a budget of $250,000 in untraceable cash, and the involvement of no fewer than ten individuals.

But that wasn’t even his first proposal.

His first plan, proposed two months earlier, involved a $1 million programme, featuring a “chase plane”, break-ins, kidnapping and mugging squads, and a yacht featuring “high-class call girls” to blackmail Democratic politicians. The sort of thing that high-ranking IMF officials wouldn’t necessarily be averse to participating in, when not busy saving the world.

Magruder reports that “no-one was particularly overwhelmed with the project” but “after starting at the grandiose sum of $1 million, we thought that probably $250,000 would be an acceptable figure.. We were reluctant to send him away with nothing.”

You do not need to be a senior Republican activist to master this particular strategy. Any seven-year old girl could proffer a similar negotiating gambit:

“If you want a kitten, ask for a pony.”

So you can choose to trust the newspapers. You can choose to trust the marketing businesses masquerading as asset management firms. You can choose to trust bloggers. But you will probably be well served by shrinking, rather than expanding, your universe of advisory inputs, and focusing on a smaller, more focused network of trusted – and trustworthy – serious and intelligent people. If in doubt, trust no-one.