Financial Pornography
There is no formal definition of the term “financial pornography” (FP) but like the Supreme Court has written, “I know it when I see it”. The term commonly refers to the depiction of financial or investment material in such a way as to arouse or elicit an intense, emotional response. The cure for FP addiction, as you might expect, is an understanding of how capital markets work.
In some cases, FP is just annoying, like having to sit through incessant TV ads for “this” investment company or “that” investment company, each expressing how their method of investing is the way to go. These ads all play on one of two (and sometimes both) simple human failings/traits, fear or greed. True securities analysis may have at one time been able to give one investment company a *sustained* advantage, but the tragic irony is that there are so many of these very smart, very qualified people doing this type of work that they are unable to sustain an advantage, because they have to consistently beat all the other very smart, very qualified people doing the same work.
Passive investors paradoxically benefit from their toil. Because they are so good at what they do, the stock market is an “efficient” one, meaning that at any one given moment, the value of the market is likely to be the “correct” one. There are moments, like the one’s we are experiencing, that mis-pricings can occur. It does not mean the market is inefficient. We are emotional beings and accordingly, gross mis-pricings (if they exist) are due to behavioral reasons.
But FP addiction can be very hazardous to your wealth. Kindly note the video above. It is Jim Cramer on CNBC’s Mad Money show advising people not to sell Bear Stearns last week (when they could’ve gotten out at around $60/share). Now, I am not blaming Jim Cramer for this, he’s got an entertaining show to provide. That’s his job! Whether he was wrong because of a bad call or you think something’s “fishy”, is a question I’ll leave to you.
The blame for following this advice rests solely on the shoulders of people who equate investing to entertainment.
Financial advisors are not responsible for setting investment policy - you are! The corollary to this is that we don’t set investment policy from entertainers playing financial advisors on TV.
True financial advisors are those that are responsible for building appropriate portfolios that help meet your financial goals and match your willingness, need and tolerance for risk. They assist in fund selection, placement, and perhaps a little assistance in tax planning as it relates to tax loss harvesting. Can they *assist* in setting investment policy, OF COURSE, but the ultimate responsibility is yours.
Setting an appropriate investment policy in writing will save you from yourself.