It is virtually impossible to write journalism without editorializing. A journalist must write at least what she firmly understands to be the facts, even when she is merely quoting someone who she believes knows the facts. Journalists have, for example, confronted a problem with Donald Trump because he lies so frequently. So they have adopted a way of reporting on what he said, for example, “Trump baselessly claimed that the 2020 election was stolen.”
Editorializing intrudes subtly in other reporting too. For example, if one reads a news story in a mainstream U.S. publication about relations between China and the United States, but imagines that it is instead about France and Germany, one may be able to detect the tacit intimation that one country is well-intentioned while the other is cold and calculating and ill-intentioned. It is nearly impossible to eliminate slant because the story is built on top of the reporter’s and her profession’s underlying assumptions.
Financial journalism has a problem. Apart from a few writers such as Michael Lewis, it is essentially bought and paid for by the financial industry itself – especially, investment management. To the extent that it editorializes, it is sycophantic to the industry.
I was motivated to write this piece by a June 7 article in the Financial Times titled “Nvidia’s rally forces money managers to play catch-up.” Unlike articles about known liars and exaggerators, this article – like so many others in the financial press – expresses no skepticism or reservations whatsoever about the practices on which it reports. As a result, it reads as if the money management actions on which it reports are perfectly normal, and sensible, and an example of the industry’s application of its savvy and expertise.
“Normal” yes. But sensible, and an example of the use of its expertise by an industry savvily pursuing what are assumed to be its objectives? No.
We better catch up with that horse by closing the barn door
The article’s opening sentence says, “Big money managers missed out on the rally in Nvidia and spent the past two weeks catching up, racing to amass shares of the U.S. company that has become a go-to bet on artificial intelligence.”
Does this make any sense? They missed the rally, so they’re scurrying to buy it now, when now is too late. This is the opposite of the advice dispensed by hockey great Wayne Gretzky, “Skate to where the puck is going to be, not where it has been.”
Yes, we know there is at least one real-world “rational” reason why, as businesses trying to retain their customers, they might do that. But of course, this reason is not mentioned in the Financial Times article.
That reason holds particularly for those money managers who manage money for clients with boards of trustees, such as pension funds. It is well known that such money managers practice “window dressing.” They make sure before a board meeting that their portfolio contains substantial amounts of any stocks that board members might know have increased in value recently. That way, the board members can be tricked into thinking that the portfolio held those stocks during their recent run-ups – even if they didn’t.
It would have been salutary if the reporters on this story had explained this as one reason why a money manager might buy a stock when it is too late, because it has already experienced its price increase. Of course, that would have exposed the cynicism that is all too often characteristic of the industry. As captured journalists, the reporters would not have been wont to do that.
“Catching up” is impossible
The idea that big money managers could miss the Nvidia rally and then spend the next two weeks “catching up” is absurd on its face. There’s no way to “catch up” on an opportunity that occurred in the past and is now gone. You didn’t capitalize on a run-up in Nvidia stock during its recent run-up, and you can’t do it now, because that happened in the past. It’s possible that the stock will continue to rise, in which case you will benefit from that rise if you buy now. But that would require skating to where the puck (the stock price) is going to be, not where it has been. And even if you do benefit from that next run-up, if it occurs, you’ve still lost the opportunity to benefit from the one in the past and there’s no way you can “catch up” to somehow recover that lost benefit. As trivial as these observations may be, a reader of the FT article would not learn them there. The reader might not even realize that they are true from reading the article. In fact, the reader might think that those money managers were shrewd to at least “catch up,” as if by doing so, they could recapture their lost opportunity. Instead, they have lost out to those they are buying from, the ones who actually did capture their lost opportunity.
Skating to where the puck will be?
One of those money managers playing “catch-up,” confronted with my accusation that they are skating to where the puck is or was, rather than to where it’s going to be, would undoubtedly retort that she does skate to where the puck is going to be – by predicting the future stock price.
But the Wayne Gretsky analogy is not, in fact, appropriate. A stock price does not behave like a puck sliding across ice. A better analogy would be a spinning top on ice. It is now very well known, due to efficient market theory1 , and all the accumulated evidence for what it implies, that future stock prices are unpredictable. The abysmal forecasting record of stock forecasters, who are known to forecast no better than monkeys throwing darts at stock listings in The Wall Street Journal, together with the abysmal record for “beating the market” of professional investment managers – emphatically including hedge funds – is proof of that. But you would never know this from reading this column on professional investment management in The Financial Times. It is possible that financial journalists are too naïve or not intelligent enough to ask the right questions, but this could be motivated ignorance.
The price of failing to express skepticism where it is warranted
Fox News learned the price for failing to express skepticism when citing the views of an interviewee – indeed for cheering them on – when it recently settled a lawsuit lodged by voting machine company Dominion Voting Systems for $787.5 million. And it may have to pay possibly a greater amount in a lawsuit filed by another election technology company, Smartmatic, for $2.7 billion.
Financial journalists, instead of expressing skepticism about the effectiveness and even sincerity of professional investment managers claims and strategies, treat them – as Fox News treated its interviewees’ claims of voting fraud by the election technology companies – as something to be taken very seriously. They could, instead, pepper their reporting on investment management strategies – such as “catching up” after missing the Nvidia rally – with expressions of doubt, much as they report on U.S. election deniers’ claims by modifying them with words like “baselessly” and “without evidence.” Whenever they report on investment managers’ strategies or claims they could pause to note that there is no evidence that these strategies are able to beat a market average or that they can justify the fees paid for them. That would be honest reporting and should enhance financial journalists’ reputations for truth and accuracy.
It is unlikely that a coalition of investors will sue financial journalists for misleading reporting, the way Dominion and Smartmatic sued Fox News. Nevertheless, it is something that should be considered. I do not say this in complete seriousness for the simple reason that I do not believe in resorting to lawsuits when it can possibly be avoided. Nevertheless, it may be useful as a thought experiment.
The average reader of the financial press believes that professional investment managers can deliver a service that justifies their very high salaries. Nothing could be further from the truth. Unfortunately, they will never learn the truth from the mainstream financial press, who are entirely bought.
Economist and mathematician Michael Edesess is adjunct associate professor and visiting faculty at the Hong Kong University of Science and Technology, managing partner and special advisor at M1K LLC. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, was published by Berrett-Koehler in June 2014.
1 I have just learned, in a book by Ananyo Bhattacharya titled “The Man from the Future: The Visionary Life of John von Neumann,” that efficient market theory was pre-figured by von Neumann’s coauthor, Oskar Morgenstern, of a seminal book on game theory published in 1944. The book says that “[Morgenstern’s] dissertation was a sustained attack on economic forecasting, which he argued was impossible… The crux of Morgenstern’s argument was that any prediction would be acted on by businesses and by the general public, and their collective responses would invalidate it. Any updated forecast would be dogged by the same problem.”
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It is virtually impossible to write journalism without editorializing. A journalist must write at least what she firmly understands to be the facts, even when she is merely quoting someone who she believes knows the facts. Journalists have, for example, confronted a problem with Donald Trump because he lies so frequently. So they have adopted a way of reporting on what he said, for example, “Trump baselessly claimed that the 2020 election was stolen.”
