The Dangers of Financial Pornography

What is Financial Pornography?

‘Financial pornography’ is a phrase used to describe sensationalist media coverage of financial news. After all, the media’s ultimate goal is to sell papers, and shocking headlines are the most effective way to achieve that goal. So whether the market is seeing small positive or negative fluctuations, it is the media’s job to make those small changes seem like big news. It makes one wonder just how reliable these headlines really are?

An Example of Financial Pornography

Example of Financial Pornography in a newspaper article titled "Global equities sink as uncertainty in Italy inflames fears"

Old Newspaper Article: “Global equities sink as uncertainty in Italy inflames fears”

Take this old newspaper article above as a case in point. The headline, ‘Global equities sink as uncertainty in Italy inflames fears’ is a real, well, heart-stopper – even for the most seasoned investor. But don’t go pulling your investments quite yet! Read the content… carefully.
When decisions depend on the information provided by others, especially the media, investors are more likely to make bad or imprudent choices.

Financial Pornography’s Affect on Financial Decisions

There have been a number of recent studies that have demonstrated a strong correlation between stories reported by the media and stock market reactions. Just think of how jittery the markets became, and how quickly the rand responded to machinations against South African Finance Minister, Pravin Gordhan. Making any rash investment decision at that point would have been foolish. Remember how quickly the rand rebounded and remember too how the market recovered after the 2008-2009 crises. For all the stress experienced during this period, it was rather uneventful if one simply ignored the noise and stuck to the plan.

Newspapers, news channels and political bravado are not an accurate depiction of reality. The speculation of doom and gloom is what ultimately sells. Sensational headlines play on fears and cause us to make bad choices. Overreaction is a human behaviour that is notorious for affecting market prices. All things being equal, in a rational market the fundamentals of a company determine its market price and there should be a clear relationship between the two.

Risk factors such as newspaper and TV news headlines, however, can be one of the biggest headwinds facing an investor as these constantly promote the negative. Headline risk can be grouped in the same genre as golf course talk, cocktail party chatter or the latest best-seller whose author beat the market and ‘can show you how’. Although the guiding principles of good investments have been known for decades, evidence suggests that most investors do considerably worse than they would have if they had adhered to a few simple principles.

This is best stated by Bill Bachrach in his book The Confident Advisor (Page 50*) where he claims:

“No external event is the determining factor of financial success or failure. The determining factor was, is today and will always be the choices made before, during and after these events”.

Bill Bachrach

Remember, it is the media’s job to sell newspapers by sensationalizing the facts. It is of no consequence to the media whether you become a successful investor or not – guard yourself against it. The ultimate question, therefore, is:

How do I Avoid Getting Caught in the Media’s Web of Deception?

Firstly, have a financial plan in place that you understand and have confidence in. That way you can stick to it and ignore sensational headlines.
Secondly, read beyond the headlines. If it sounds like the end of the world is near, more than likely it isn’t.
Finally, speak to your financial adviser before making any big decisions.

At Stone Wealth Management we are experts in managing your financial investments and are experienced at dealing with such ‘Financial Pornography’ to your benefit.

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