Stock Investing: Beware of TV Talking Heads

Talking heads, we’ve seen them all, they are the “investment experts” that fill a lot of TV time slots with their opinions and commentary on the market in general and stocks in particular. They are investment professionals such as portfolio managers, financial advisors and investment strategists hosted by business journalists on business channels. They appear on TV, fire a set of “likes” and “don’t likes” with a brief explanation when lo and behold every stock that was mentioned reacts by moving in the direction implied by the guests’ verdict. If the interview is live during the day, the stocks will react instantly while if the opinions were given after market close, the next morning will see the mentioned stocks react.

The fact that these stocks react to the expert’s opinion from TV indicates a sheepish behavior on the part of the investors buying or selling them. Maybe “TV investors” should question the level of trust they put in these people by reviewing the following points:

How much did you learn: The TV pundit shared some exciting information about a number of companies, you just got to know what the expert knows but what about the information he doesn’t know about the company? There is a lot of information you still ignore either because your TV expert wasn’t transparent enough with providing everything he knows or because he simply ignores that information to start with.

How much skin is in the game: What does “I like this stock” mean? Does the expert own this stock to start with? If yes, how many shares does he hold? What percentage of his portfolio is invested in this particular stock? Simply stating an opinion is useless if the guy doesn’t follow up by disclosing his personal or his fund’s holdings in that company.

How much of it is “book talking”: Don’t you wonder sometimes if the fund manager has a conflict of interest when he fires off his ratings? For all you know the fund might be accumulating a stock he “doesn’t like”. Maybe a stock he shorted needs to be talked down to give his trade some traction. Could he be looking to ease the fund’s exit of a major position in a company by spurring demand with a “top pick” label?

Even-though several variables might turn some of these picks into profit, one fact remains: You are at a disadvantage when you buy based on someone else’s recommendation because you do not know if there are hidden motives behind these ratings.

I am not here to shoot down every analyst that shows up on TV. I simply wish to shed some light on what might be lurking behind those opinions. My advice is not to act on anyone’s recommendations when it comes to stocks, always take the time to do your own due diligence. This also applies to my blog where I don’t recommend stocks to start with; I simply share my trading journal.

Have you ever invested based on a recommendation from TV? What do you think?

13 comments to Stock Investing: Beware of TV Talking Heads

  • I don’t understand. Does this mean that I should or shouldn’t buy Cramer’s recommendations? :-)

  • Jeff

    Cramer’s as much of a joke as 50 cent’s twitter activity. Just as 50 cent pushed up the value of a luxury hand bag company through tweets, Cramer adds value to and devalues companies every single day. I’d rather read the balance sheets for myself, rather than having Cramer decide for me.

  • Jeff

    this is my favorite video of when cramer was wrong.

  • This is so true! It’s also very related to a post I’m writing!

  • Mich

    @PWD, that would be the “shouldn’t” part :)

    @Jeff, awesome video, thanks for sharing man!

    @Robert, Looking forward to that post.

  • Great points! I’m thinking a lot of talking heads are entertainers, especially Kramer. Sadly a lot of lazy investors who don’t like doing due diligence use his words as a reason to buy. Buyer beware. Jeff, that video was hilarious! :)

  • Jim “What-a-Tool” Cramer is one of the more visible, and the most cartoonish. In the days before media like, his failures would have gone unnoticed. These days, one would think that they couldn’t hide from their record, but yet they are, back on the air.

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  • Mich

    @Buck, lazy is the right words to describe TV investors. They just love someone doing the work for them! or so they are led to believe….

    @101, it’s all a question of supply and demand, I guess some people love to buy stocks following a heartily entertaining time on TV! too bad it has to be that way for these people :)

  • Well, to be somewhat charitable to Cramer, let’s remember that hindsight is 20/20. So yes, it is funny and makes us laugh that he so emphatically tells Peter not to sell his Bear Stearns, but later, he claimed (to Jon Stewart) that their executives had lied to him. Thus, if a extremely high leveraged company is lying to you about solvency issues and then you pass that info to your viewers, it is hard to know who is to blame. That being said, the advice to hold through a downturn is pretty standard wisdom. We held all of our portfolio holdings through the 2008-2009 crisis, except what was necessary to liquidate in order to claim as losses on our income tax that year. Now we are back up.

    Banks were considered sound investments by most people in the days leading to 2008. Who would have thought that Lehman Brothers, Bear Stearns, WAMU, Wachovia, and so many others would bite the dust? And who could have determined which of the banks that the Federal Reserves was going to bailout?–the Bernanke put. And who of us even understands a bank balance sheet in the first place? I personally am worried about Bank of Nova Scotia’s 3.3 billion dollar short of gold–if / when gold shoots up 1000% (perhaps the next Black Swan event) that would be a short position equal to the bank’s entire market capital. And yet Canadian banks have been praised as sound investments and so much better than their yankee counterparts.

    I just think as investors its necessary to maintain a certain level of charity. All of us are putting our capital at risk in the hopes of making money, beating the index and inflation/deflation. But it is a difficult environment and there are so many advisors that it is extremely difficult to know what to do (don’t get me wrong, I think Mich’s advice in this post is right). I’m just glad that the my worst investment over this whole period, pmt, pays a regular dividend and that I was able to make back the losses by reinvesting that dividend in junior oils. And just one last defense: Cramer said to buy Caterpillar and my trades of CAT were up $5000 (before I blew it all in a commercial real estate deal with my brother in Austin, TX). So Cramer isn’t always wrong–I suppose that’s why people keep listening to him. I look pretty foolish too if you focus only on my blunders.

  • @ PW Dunn.

    You’re OK.

    Cramer’s still a tool.

  • I never understood those stock picking shows…If I am not allowed to buy Stock XYZ because I am going to talk about it on a show, wouldn’t I make more money buying Stock XYZ and betting the farm on it rather than just talking about everyone else buying stock xyz?

  • Mich

    @PWD, there are so many advisors out there indeed and just like having many forecasts results in 1 or 2 hitting, it’s the same thing with those advisors.

    @Evan, would you prefer prospecting for gold or selling tools to gold prospectors? I think it comes down to that.

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