Is the Media Gaming You?

by Alexander Green, Chief Investment Strategist
Monday, August 9, 2010: Issue #1319

Almost every day, friends and business associates forward me media stories about the economy or the financial markets and ask me to comment.

But my comment on every story – whether bullish or bearish – is always the same: “Perhaps.”

Perhaps the economy will experience a double-dip recession. Perhaps gold will hit $2,000. Perhaps the market will surprise everyone and rally in earnest.

But if this is too indefinite for you, let me emphasize a few certainties…

The Media’s M.O. is Bad for Your Bank Balance

It’s certain that the media doesn’t know who is right or wrong about the stock market, interest rates or currencies.

It’s certain that the “experts” they’re interviewing don’t know either. (Although there is a good living to be made by pretending to know.)

It’s certain that the media doesn’t exist to help you grow your portfolio or achieve financial independence. Rather, the media exists to sell advertising. The best way to maximize advertising revenue is to attract readers (and viewers). And the best way to do that is to have something – anything – sensational to say. Sensationalism grabs people’s attention – and that’s all sponsors really require.

This works beautifully for the media. But does it work for you? Of course not. The media is out to game you.

Hunting for a Good Stock? Ignore the Media and Ask These Nine Questions Instead

Never once have I met an investor who said he made a fortune in the market by constructing a worldview based on media reports and then shuffling his or her money around accordingly.

The very idea is absurd. So rather than listening to some pundit or self-styled guru who has the world all figured out, take a look at the smaller picture. In particular, if you want to make money in the market, seek out a great business and ask:

  1. Does the company have good economics? In other words, is it part of an industry that isn’t driven by price competition alone?
  2. Does the company have a consumer monopoly or brand name that commands loyalty?
  3. Are the earnings on an upward trend with good and consistent profit margins?
  4. Is the debt-to-equity ratio low, or the earnings-to-debt ratio high? Can the company repay debt, even in years when earnings are lower than average?
  5. Does the company have high and consistent returns on invested capital?
  6. Does the company retain earnings for growth?
  7. Does the business have high maintenance cost of operations, high capital expenditure or investment cash outflow? (If so, that’s not good.)
  8. Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
  9. Is the company free to adjust prices for inflation?

Look for Facts, Not Fluff

As a stock market investor, these are things that are definitely worth knowing. And if you don’t have time to uncover the answers yourself, at least listen to someone who does.

And notice something important. None of the questions above make a good headline. They don’t grab your eye. They don’t force you to pay attention. At least not like “Dow 4,000!” does…

So don’t waste your precious time chewing on economic punditry. Warren Buffett said it best: “Let blockheads read what blockheads wrote.”

Good investing,

Alexander Green