I spent 25 years in mainstream journalism and enjoyed almost every minute for it. The buzz, for me, was having to get your head around complex subject matter in a very short space of time. There’s nothing like the adrenalin rush of holding forth for two or three minutes, live on television, on a subject you knew little or nothing about when you got out of bed.
In many ways, not having in-depth knowledge is a positive advantage for a general news reporter. It forces you to focus on the essential information, thoroughly understand it, and then explain it to an audience which, by and large, has an even more basic understanding of the issues involved. There are, however, some areas of journalism which demand specialist expertise, and personal finance is definitely one of them.
In conversation with a distinguished professor of finance a few weeks ago, I happened to ask him, Why do the vast majority of investors continue to use actively managed funds despite the overwhelming academic evidence that they shouldn’t?
“Amateurish journalism,” he replied. “Young people with English and history degrees writing about a subject they have no formal training in.” His comment challenged me, and not just because I’m a history graduate who’s never taken a course in finance.
Now I would certainly take issue with the phrase “amateurish”. Most of the financial journalists I’ve come across are intelligent, ethical people who take their vocation seriously. But the professor is right to have concerns about qualifications.
Those who write about investing have a huge responsibility to their readers. People read what they have to say, assume that it’s correct and often act accordingly. Those actions can have a big impact on their lives and those of their dependants. Editors, then, need to insist on far higher levels of knowledge and understanding than they do.
Jonathan Clements, himself a personal finance journalist, has written a very candid article on his profession which every investor should read. Among “the 14 things financial journalists won’t tell you”, he says, are the following:
- What qualifications do I possess? An ability to dial a telephone.
- Actually, I always wanted to be a sports reporter.
- If you saw my portfolio, you’d never ask me for financial advice.
I dare say Jonathan’s article was partly written for comedic effect. But, believe me, I can relate to every point he makes, and I’m sure that most of my professional colleagues could as well.
Someone else who would probably agree with my professor friend is the investment author William Bernstein. “Journalism attracts people with exceptional linguistic talent,” he once wrote, “but I have found that very few have the mathematical sophistication to appreciate the difference between skill and luck.”
That, in a nutshell, is why many journalists struggle with the active versus passive investing issue. Anyone who has studied fund performance in any detail can tell you that its overriding characteristics are randomness and reversion to the mean. There are so many funds to choose from — more funds than individual securities — that, simply by the law of averages, there are bound to be short-term winners.
Journalism is essentially story-telling; journalists have a constant need for new stories, and the fund industry is understandably delighted to oblige. News desks are bombarded with press releases every day, and there’s no shortage of “experts” on hand to provide a juicy quote. There are always funds that are outperforming at any given time and — surprise, surprise — those are precisely the funds that get written about. People love to read about “star” managers who appear to be on the ascendancy.
The truth, by comparison is, very dull. There are only so many times you can tell your readers that only about 1% of funds outperform their benchmarks over meaningful periods of time and that future winners are almost impossible to spot in advance.
Besides, if you told investors what they really need to hear — namely that they’re better off investing in a broadly diversified portfolio of index funds and more or less forgetting all about it — what would you write about next week? And would those brokers and active managers whose adverts effectively fund your salaries simply divert their ad spend to rival, more “on-message”, publications?
So, what’s the answer? For journalists who haven’t studied finance, there are specific university courses in financial journalism. Editors should also consider training courses for their new recruits; here at The Evidence-Based Investor, we plan to offer such courses in the near future.
In the meantime, there is no substitute for journalists reading about the basics in their own time — subjects such as the Efficient Market Hypothesis, the Capital Asset Pricing Model and the Fama-French Three-Factor Model. I’m always happy to suggest specific books and articles.
Without such education, journalists will continue to fall prey to the subtly seductive charms of the financial public relations industry. For the sake of end investors, that can’t be allowed to happen.