How To

Tricks to dialing down media hype before investing

Tue 12 Jul 22, 3:38pm (AEST)
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Key Points

  • Investors who use the media’s thoughts as their primary guide risk making big mistakes
  • Avoid sliding down the path of click-bait
  • Self-managed super fund members and DIY investors are often the target of financial media coverage

As well intended as media coverage might be, it’s often highly ambiguous, overly superficial or simply wrong, and the consequences of investing on the strength of this information can be disastrous.

When the media collectively ‘sells the hyperbole’ for the sake of a headline, it’s easy for half-truths to gather global momentum.

Once it hits a social media website, news can gather a stickiness that’s hard to shake off.

As a case in point, crowd support for bitcoin – based on media reports that it would eventually hit $1m – gave investors the false comfort it was as safe as houses.

Has history taught us anything?

More deliberate examples of media hyperbole include Business Week’s infamous The Death of Equities issue of August 13, 1979.

While the cover story tried to argue that inflation was destroying equities, only a few years later the share market embarked on one of the biggest rallies in history.

Has the same (seemingly false) narrative 40-odd years later soured your appetite for shares?

Investor paralysis

There’s a commonly held perception that A) the US economy is already in recession and that B) the Federal Reserve (The Fed) put it there on purpose as the only way to cool inflation.

Is this fact or conjecture?

Speculation of a future oversupply of lithium – leading to a sharp (price) correction – is now so embedded in investors’ psyche that only contrarians appear willing to invest in the sector.

Then there are brokers peddling a worst-case scenario for the oil price, with one broker speculating it could triple if Russia cuts its supply.

Well, it could, but will it?

Recent media coverage would also have you believe that borrowers and bond investors alike have both been burned due to the central bank’s failure to provide reliable guidance on inflation and interest rates.

Bottom line is if you’re doing either on the strength of Reserve Bank policy, get help!

The media machine needs feeding

The trouble is if you’re sidelining yourself from the market or selling off in the expectation of any unsubstantiated eventuality, you could be doing yourself more harm than good.

Too many media sources are overly focused on being first to feed the 24-hour news cycle.

As result, they’re often more comfortable for their editorial to be shanghaied by someone else’s hidden agenda than acting as gatekeepers to fair and balanced reporting.

When news becomes your worst enemy

Remember, self-managed super fund (SMSF) members and DIY investors are often the target financial media coverage because they’re more likely to act independently of structured advice.

But the risk of an SMSF or any investor taking financial reporting at face value is that media coverage of a company’s annual or half yearly earnings announcements is typically based on its press releases (aka announcements).

Couple that will inexperienced reporting and your media source has just become your worst enemy.

Financial trickery

The danger of press releases is that they draw from an adjusted measure of earnings, with numbers that are contrary to what generally accepted accounting principles (GAAP) prescribe.

With certain costs excluded, investors often get a false perception of profitability, and no meaningful measure of real-life performance.

Hoary old tricks to be wary of include media coverage that allows management to get away with fancy balance sheet manoeuvrings designed to hide more meaningful signals of distress on their income statements.

Don’t become click bait

One way to mask the impact of financial leverage is to focus investor attention on earnings before interest and tax (EBIT) and strip out charges deemed non-operating.

By only owning 49.9% of a business that may carry a lot of debt, companies are not obliged to include it on the balance sheet, and a lot of leverage can be disguised within its consolidated reporting.

If there’s an enormous difference between operating earnings and bottom-line earnings or net profit after tax (NPAT), you need to find out what it is and why.

Investors should look for media coverage that adopts the old Reaganism of (a) ‘trusting’ a CEO’s commentary that earnings have materially increased, but then (b) ‘verifying’ it by looking for evidence of it within the numbers.

If you don’t, you risk sliding down the path of click-bait, which drives readership.

Ten tips to becoming a media-savvy investor

  1. Temper nanosecond reporting with in-depth coverage.

  2. Allow time for fact verification, analysis and well-written reports.

  3. Consider seeking professional advice.

  4. Dismiss definitive statements for what they are.

  5. Look beyond head-lines and biased coverage.

  6. Avoid coverage that only feeds what management wants you to see.

  7. Avoid brokers who recommend buying/selling based on a 20-word summary.

  8. Curb your attraction to bad news.

  9. Remember, commentators can be wrong.

  10. Draw on financial history for added context.

 

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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