I received a report from AFM Asset Management, dated Second Quarter 2008. I would like to paraphrase some of their comments which I find are quite germane to today’s scenario. In a recent interview of a money manager, the question was asked how he accounts for his investment success. One of his answers was that he banned all financial news broadcasts from his office. Banning TV and market updates enabled him to form his own unbiased view. Financial news can be great entertainment but can give one a distorted view of the markets. One contrarian indicator is to take the opposite view of any company featured on a major magazine cover. By the time the article reaches the magazine, the news is already reflected in the price, hence the price will probably go in the opposite direction. Three finance professors reviewed headlines from Business Week, Fortune and Forbes over a 20 year period. These University of Richmond professors wanted to determine if positive cover stories were followed by superior performance and vice versa. Based on 549 cover stories, positive and negative, their conclusions that companies that received the most positive coverage, underperformed, while those who got negative coverage overall managed to beat the market. Positive stories generally indicate the end of superior performance and negative news generally indicated the end of poor performance. Individuals who use the news coverage as a basis their investment choices are often destined for failure. Investing based on media news has a poor track record. Consider it entertainment not a solid source for the future.

Thanks to AFM Asset Management for the data.

Gary Marsella

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