How can advisors deal with stock market media hype?Article added by Dave Scranton on June 25, 2012
Dave Scranton

Dave Scranton

Joined: February 23, 2011

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Advisors can't control media hype about the stock market but we can take strides to ensure that our clients recognize hype for what it is, and respond accordingly.

The media loves hype, and that’s something I always tell people to keep in mind when it comes to any news having to do with the stock market. Think about the weeks leading up to Facebook’s initial public offering. The press had a field day with stories about average-Joe investors lining up waiting to purchase their shares as though camping overnight at Best Buy awaiting the release of the next big Apple gadget.

What happened in the weeks that followed is just another example of how media hype often runs counter to reality where the stock market is concerned. As everyone knows, the Facebook stock price quickly foundered after first-day trading glitches, while the company and the investment banks that led the IPO were slapped with lawsuits alleging analysts misled some clients while tipping off others.

Whatever the eventual outcome of those suits, the mess has already tarnished the once-beloved Facebook brand, and taught a number of everyday investors a hard lesson about the potential pitfalls of buying into any kind of media hype surrounding the stock market.

What’s important to understand here is that stock market hype isn’t just a product of the media, nor is it driven solely by a desire to sell papers, boost ratings or (in the Internet age) get website hits. It runs deeper than that and is comprised of a formula that makes its existence not just understandable, but almost inevitable.

It all starts with the fact that the number one defined fiduciary responsibility of a Wall Street CEO lies not with investors or account holders, but with shareholders. His prime directive is to increase shareholder value, first and foremost by increasing company profits. How? Obviously, getting and keeping customers is the first step, but another is keeping as many of those customers as possible fully invested in the markets. When revenues from stock trades and/or fees go down, so does shareholder value.

It’s a given, of course, that people are more apt to invest and stay invested when they’re optimistic about the future and believe the markets are strong and growing. Thus, every Wall Street CEO has something of an obligation to his shareholders to paint an optimistic picture of the markets as often as possible, regardless of what the reality might be.

From that CEO, there begins a trickle-down effect. Just as he is obliged to please his shareholders, his brokers are obliged to please him. Many advisors are, in turn, obliged to the big brokerage firms, on whom they rely for research and information. And finally, the media shares in all this optimism, in part because it’s now being parroted by so many of their “sources,” and also because these same sources are likely to be among any media outlets biggest advertisers.
Think about the financial media in the late 1990s, when the best long-term secular bull market in our nation’s history was nearing its end. Do you remember reading or hearing much at that time suggesting that the party might soon be over? Certainly, there were some analysts, and advisors like myself, who saw the downturn coming. And there were warning signs in the way of skyrocketing price-to-earnings ratios and the lessons inherent in more than 200 years of stock market history. But was the media interviewing these naysayers or calling attention to these warning signs?

Not much they weren’t, because the need to push optimism from the top down on Wall Street almost always wins out, regardless of reality. This is probably why in the midst of all the optimistic hype surrounding Facebook’s IPO, few, if any, media sources were calling attention to the fact that – regardless of what the projections might be for this particular offering – we’re still in the midst of a volatile, long-term secular bear market cycle, and any level of market exposure in this environment comes with some risk.

What’s unfortunate is that, according to reports, the Facebook hoopla did succeed in luring back some investors who had sworn off stocks at some point since the start of this secular bear cycle in 2000 – demonstrating how even people who “know better” can be swayed by media hype when it’s strong enough. Many ended up selling at a loss in a matter of days, while the allegations of unfair play by analysts, and favoritism toward big investors, reaffirmed their skepticism of Wall Street.

I would argue that during a secular bear market cycle, that kind of skepticism is, ultimately, healthy.

Having said that, I do want to point out that I’m no conspiracy theorist, and for the most part, I don’t believe the formula that creates stock market media hype stems from ill-intent on the part of anyone. It’s simply a flawed system in which hype exists as a natural by-product. As advisors, we can’t control that, but we can take strides to ensure that our clients recognize hype for what it is, and respond accordingly.

Keep in mind, sometimes even that latest Apple gadget is flawed and has to be recalled, and all those people who got caught up in the hype and camped out at Best Buy are the ones who have to deal with it.
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