The media is atrociously bad at prediction and I’m sick of it

32 Comments- Get free updates of new posts here

0 0 0

[This is part of the IWillTeachYouToBeRich Week of Discontent.]

I’m so sick and tired of financial and business magazines that I could vomit. It’s absurd to see yet another “10 Stocks You Must Buy in 2007!” issue of a magazine. I just point, laugh, and walk by whenever I see these. This is a little ironic considering I was featured on MarketWatch.com and Yahoo Finance yesterday, but oh well.

Why do I ignore and mock the media for predictions about stocks and business?

1. They’re often wrong. These magazines are designed to sell magazines, not good financial advice. Take Fortune’s 10 Stocks to Last the Decade, a sexy-sounding article that truly goes the distance by including stocks like Broadcom, Nortel Networks, Enron, and Charles Schwab. Now look at the results.

There’s also a curiously amusing 2003 study by McKinsey, the top management-consulting firm in the world, which concluded that Google was not a serious threat:

Few at eBay initially saw reason to fear Google…in part because of a 2003 study it commissioned from McKinsey & Co. McKinsey concluded that Google wouldn’t use its search capabilities to break into e-commerce. That made Google a manageable threat, say people familiar with the study.

Oops.

Let’s not forget BusinessWeek’s accusatory 2001 article, in which it wrote: “Sorry Steve, Here’s Why Apple Stores Won’t Work.” TheStreet.com chimed in, writing, “It’s desperation time in Cupertino, Calif.,” and consultant David Goldstein predicted, “I give [Apple] two years before they’re turning out the lights on a very painful and expensive mistake.” Ironically, Fortune gleefully catalogued how wrong these predictions were while ignoring its own constant failures of prediction.

I’m not knocking the difficulty of prediction. It’s really hard. That’s why I don’t do it, and that’s why I scoff at magazines whose entire value proposition is “predicting” what will be hot next. They simply aren’t worth the $4.95/issue they charge.

2. They’re not accountable. The problem isn’t just being wrong, it’s not being accountable. These magazines will literally laud a CEO one year and then turn around and write a negative slam piece haranguing the same person immediately afterwards. Note BusinessWeek’s cover story of Bob Nardelli, CEO of Home Depot, in March 2006, where they gushed,

Skip the touchy-feely stuff. The big-box store is thriving under CEO Bob Nardelli’s military-style rule…Chief Executive Robert L. Nardelli is putting his stamp on what was long a decentralized, entrepreneurial business under founders Bernie Marcus and Arthur Blank. And if his company starts to look and feel like an army, that’s the point. Nardelli loves to hire soldiers. In fact, he seems to love almost everything about the armed services…It’s hard even for Nardelli critics, including ones he has fired, not to admire his unstinting determination to follow his makeover plan in the face of scores of naysayers. They describe being “in awe” of his command of minute details.

Riding a housing and home-improvement boom, Home Depot sales have soared, from $46 billion in 2000, the year Nardelli took over, to $81.5 billion in 2005, an average annual growth rate of 12%, according to results announced on Feb. 21. By squeezing more out of each orange box through centralized purchasing and a $1.1 billion investment in technology, such as self-checkout aisles and in-store Web kiosks, profits have more than doubled in Nardelli’s tenure, to $5.8 billion.

Really? That’s interesting, because 9 months later, in January 2007, BusinessWeek ran another cover story:

Out At Home Depot: Behind the flameout of controversial CEO Bob Nardelli. How convenient. As BusinessWeek noted in its carefully worded article,

The sudden fall of one of America’s best-known CEOs illustrates how perilous times have become for corporate leaders…During the current housing slowdown, however, the financials have eroded. In the third quarter of 2006, same-store sales at Home Depot’s 2,127 retail stores declined 5.1%.

Perhaps it illustrates how poor of a reporting job the magazine did, including its breathless, sycophantic writing and lack of accountability.

The flip-flopping goes on from the publication level down to the reporter level. Now, changing your mind is certainly ok–but not when you don’t acknowledge that you wrote something completely opposite less than 24 months prior. For example, in August 2005, a Fortune reporter wrote the following bombastic statement about Yahoo:

By figuring out how to make brand advertising work online, Terry Semel is on the verge of creating the 21st century’s first media giant.

In January 2007, the same reporter, this time writing for Wired, wrote an article of a decidedly different color:

How Yahoo blew it. Semel has been Yahoo’s CEO for nearly six years, yet he has never acquired an intuitive sense of the company’s plumbing.

Or maybe it’s Jim Cramer’s TV show, which offers predictions that are sexy but no better than chance.

You can also find a delightful lack of accountability with all the pundits who predicted a housing boom or crash. Try digging around for the official spokesperson of the Realtors of America. Their words are comically positive no matter what the situation is. In another example, Robert Roubini, president of Roubini Global Economics and some pundit, predicted a 2007 recession, the likes of which we haven’t seen in over a decade: “By itself this slump is enough to trigger a U.S. recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession.” Hmm.

3. To avoid being wrong, many magazines write meaningless articles that don’t say anything. I’d rather have a reporter take a stand — whether he’s right or wrong — and acknowledge how accurate he was a year later. Instead, some reporters are afraid of being wrong, so they write articles that don’t say anything. Can’t be wrong if you can’t be pinned down! Here’s a great example of a meaningless article that says nothing.

4. They ask pundits who have no business talking. When I see John Doe of John Doe Capital quoted (as you see one paragraph above), I tend to get a little wary. Frankly, I get wary of any pundit making predictions. Here’s a hilarious video poking fun at Wall Street research by asking homeless people on “Wall Street” what their top 5 stock picks are. It’s well worth your time. Are the predictions by business magazines much different?

5. Finally, these articles about the next big investment are minutiae. Think about all of these articles on Hot Stocks or The Next Business Trend. Do they let you focus on what’s really important, or do they get you caught up in the hype of the day? Here, as one example, is a page with 82395423 different management theories. The funny thing is, this page isn’t even a joke.

Reading these magazine articles and watching CNBC is fun and entertaining, but if you’re really making your decisions exclusively from a glossy paged magazine, you are a humongous moron. The unfortunate result is a bunch of people buying stupid loaded funds and stocks they don’t understand. And, on the other side of the spectrum, you get people like this who are so intimidated by all the handwavy financial punditry that they simply opt out of investing altogether.

Investing for the long term isn’t hard. Yes, it takes work, and yes, it takes some common sense. It doesn’t take the hottest stock tip of the month. Whatever that magazine article says this year, it could literally say the opposite next year and you’d never know the difference. Take some time and do some god damn research on your own. Jesus.

0 0 0

Related Articles

How to make money fast (without getting caught in a scam)

Hi, I’m Ramit Sethi, and I’m going to show you how to make more money. Legitimately (I’m ...

Read More

How to travel the world, create a life that doesn't suck, and explore the happiness of pursuit -- with Chris Guillebeau

Last month, I was travelling in Asia and had some time to kill at the Hong Kong airport. I knew ...

Read More

32 Comments

0 0 0
 
  1. What I REALLY hate are CEO interviews. Do they really think a CEO is going to bare their soul and chat about all the grave concens he has for the future of his company? It’s nothing but an oportunity to generate publicity for him. If we listened to these interviews, we’d think 100% of companies were experiencing explosive growth all the time.

  2. We should studying Warren Buffett and the stocks he buys.
    What does China, India, and Brazil need as they grow? and Look for companies who are providing those services.

  3. Actually John, I get a bit out of CEO interviews. Don’t listen for what they say, listen for what they don’t say. For example: CEO’s always talk about revenue growth, product innovation, EBITDA growth, etc.

    Are any of those missing from the razzle dazzle? Then that’s where you should dig ’cause odds are, thats where there are problems.

  4. You should read “The Halo Effect” if you haven’t already.

  5. Agreed. But, this is just a rant unless you can provide some concrete advice on doing research. Many of us do not know where to start “doing research of our own”.

  6. Travis Hemphill Link to this comment

    This is one of the best posts I have seen on any blog in a long time. Great opinion, but the best part is all the evidence you used to support your statements. Keep up the good work!

  7. Anatta, it was a rant. But if you want a place to get started, check out 50 books I recommend.

  8. Excellent points, Ramit. Those magazines are the equivalent of Time and USNews: old, middle-of-the-road stories dressed up to sound exciting. I suspect that a lot of their content is very carefully managed by the interested parties. I believe they are just the mouthpiece for the powerful PR groups that most corporations have to project the most positive image of their company and financial standing (negative in the case of their competitors). And I wouldn’t be suprised if said collaboration was intentional. It’s like all the investment newsletter my dad reads, he will just never believe me that those small guys are probably being paid to prop up dying stocks.

    BTW, you have disproved my fears about the discontent being directed towards the commenters on the “limited amount of money” thread. These are great topics, thanks.

  9. Take some time and do some god damn research on your own. Jesus.

    Let no one ever say you’re not passionate, Ramit :). Good article.

  10. Using Business Week, Fortune, Forbes, etc. and their “10 Stocks You Must Own” as the basis for your investments is like having your doctor use Men’s Health to diagnose your illnesses. No thanks.

  11. One thing about consulting firms since you mentioned McKinsey: Very very few of those guys know much. I can’t believe they charge so much because the work is basically done by students and the advice is simply repackaged or rebranded stuff coming out universities. Most of their advice is a generic application of some analysis template.

    You can do roughly the same thing by taking any current paper on “strategy” maybe from Harvard Business Review or any pop book, then duplicating the work with your client. Make sure you have a lot of flashy powerpoint and a good printed template then whamo: $250K bill.

  12. I would love for Buffet to publish an annual list of stocks he likes or economic predictions, but for the same reason I think he doesn’t is why the newspapers and media do it.

    For the amount of information the media publishes and for the amount of predictions they make, don’t they have the right for an error rate? Does this rant of a context?

    If Cramer was consistently wrong, people would stop trusting him and would stop listening to him no matter how visually stimulating he is. It’s difficult to deny the at least slight genius behind cramer, and what he tries to do for the world of finance should give him major credit, but the underlying fact is Cramer, and other media makes predictions, they are just that predictions. They do it for entertainment, but more importantly, they do it because they have a reputation.

  13. Nice video. Way to make fun of poor people! Good job!

  14. Pundit prediction should have been outlawed the first time the monkey throwing darts beat the human stock picker. Over the short course of a year anything can happen.

    What would be nice is if someone with some credentials would step up and write an article about stocks that you should buy and hold for a long time. This will never happen though because its not sexy enough to sell magazines and takes “too long” to make money in the mind of your average american.

    -Brad Maier
    whereisthedirector.wordpress.com

  15. I am surprised that you criticize Nouriel Roubini. He, the anonymous CR & Tanta of calculatedrisk.com, and yourself are three of my favorite economic bloggers- you all stress avoiding things that are “too good to be true”, honesty and durability. These three traits have been disasterously lacking in the US economy in the last five years. If the article you quoted is correct that Roubini was alone in predicting a recession (he was not) so early, that makes him a genius. Predictions are hard to make as you say, so I guess we’ll talk about it in six months.

    Here is a excerpt from his August 2006 article:
    This is the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices,” Roubini said. The decline in investment in the housing sector will exceed the drop in investment when the Nasdaq collapsed in 2000 and 2001, he said.
    And the impact of the bursting of the bubble will affect every household in America, not just the few people who owned significant shares in technology companies during the dot-com boom, he said. Prices are falling even in the Midwest, which never experienced a bubble, “a scary signal” of how much pain the drop in household wealth could cause.
    Roubini is a professor of economics at New York University and was a senior economist in the White House and the Treasury Department in the late 1990s. His firm focuses largely on global macroeconomics.
    While many economists share Roubini’s concerns about imbalances in the global economy and in the U.S. housing sector, he stands nearly alone in predicting a recession next year.
    Fed watcher Tim Duy called Roubini the “the current archetypical Eeyore,” responding to a comment Dallas Fed President Richard Fisher made last week in referring to economic pessimists as “Eeyores,” after Winnie the Pooh’s grumpy friend.

  16. Love the website with the thousand management theories. I can’t imagine how anyone could even find anything there, let alone put one into practice. You should read “Company” by Max Barry if you get a chance; it’s a hilarious (fictional) book about the latest management craze and the cubicle-farm lab rats it gets tested on.

  17. Can I ask are there any magazines out there that you do trust for their information beyond the “stocks to own” and “predictions” articles? I’m not sure if I fully agree with the accountability part of this because each investor has to be accountable to themselves. People shouldn’t expect much out of a free online article or a $5 magazine.

  18. [...] thinks that the media should STOP predicting! – I [...]

  19. Well it’s just filler, innit? I’ve certainly never spoken with anyone who follows the advice in those pieces. I see them as the same as those “Double issue 2007 MLB season preview!” articles in the sports magazines. That 4 page analysis of why the Cardinals will win the WS are never referenced again.

    Thinking on it, it must be tough to publish a finance magazine every month. There are only so many topics and ho do you repackage the simple buy insurance/index funds/save regularly/etc advice which works. Admit it, your recent content suggests you’re running out of ways to package the same advice too. No harm.

  20. [...] at I will Teach you to be Rich documents some of the errors made by financial and business magazines in predicting which businesses that would succeed and [...]

  21. Great points. It’s really easy to spout off about what is going to happen but no one ever gets checked on these tips. Sure, there are people out there doing real due diligence on stocks, but they aren’t the ones writing for business week. I have great respect for people like Warren Buffet and Marty Whitman, but only because I believe they avoid the hype and buy solid companies at discounted rates.

    BTW, that video is hilarious. I think that those tips are at LEAST as good as anything you’ll find in Money magazine etc.

  22. I am unsubscribing to your blog – I am not interested in what makes you mad. Isn’t this supposed to be ‘I will make you rich’ not bitching. Get a beer and a friend to do that. You are now wasting our time.

  23. Ramit,

    Thanks for (repeatedly) pointing out the absurdity of “handwavy” deliberations and predictions about our economy, stocks, etc. Since I’ve started reading this blog, I’ve been much more aware of this. The clearest example is the constant reporting on the housing market. Is it booming? Is it bursting? Homes are foreclosing, but the market’s on the upswing! There are some great deals, so you should buy! Rent, because the cost of owning a home is more expensive than renting! Blah, blah, blah. How about I continue paying $500 a month in rent while I invest the extra money, and buy a home in five years?

    Anyway, I’m definitely taking all of this business reporting with a grain or two of salt, and seeing through a lot of it for the hooey that it is. Thanks!

  24. I’m really glad someone finally mentioned that these finance magazines write articles with absolutely no foundation to them. They ramble on and on about how to invest and plan and stuff without actually saying anything at all. I had a subscription to Smart Money for a year and totally gave up on magazines. Now I purchase Barron Financial books, they may not be as sexy as magazines or the like but damn they have some good information.

  25. Don’t forget this classic from 95

    http://www.leadershipnow.com/leadershop/2053-8excerpt.html

    An experiment from The Economist, titled, “Garbage In-Garbage Out: Economic Forecasting, The Accuracy of the Dustmen’s Predictions,” puts the need for anticipation in perspective:

    In 1984, a questionnaire was sent to four ex-Finance Ministers, four Chairmen of multinational firms, four students at Oxford and four London Dustmen (referred to in the U.S. as Garbage men).

    Ten years later the predictions were compared to the actual results and the British Garbage men outperformed the ex-Finance Ministers and the Oxford students while equaling the foresight of the multinational business executives on a number of key economic predictions. (The Economist, June 3, 1995)

    The garbage men did a better job of anticipating what would happen than the government officials and Oxford students. Knowing what things are going to look like in advance can help you make the right decisions. Anticipation is natural. Everyone does it every day.

  26. [...] in stocks is about patience and long-term growth, not jumping on the latest pick, according to finance writer Ramit Sethi. Constantly switching between investments to make a quick buck doesn’t work. You may end up [...]

  27. [...] stoic personality to near panic levels.  For this reason, I often suggest that most people should avoid the daily financial news because it’s so overly dramatized and causes even the most resolute people to get caught up [...]

  28. [...] Media Gawker pulls off one of the finest pieces of reporting on the bailout. When I wrote The Media is Atrociously Bad at Prediction and I’m Sick of It, I highlighted how various business media point make bold predictions, get it completely wrong, and [...]

  29. [...] Media Gawker pulls off one of the finest pieces of reporting on the bailout. When I wrote The Media is Atrociously Bad at Prediction and I’m Sick of It, I highlighted how various business media point make bold predictions, get it completely wrong, and [...]

  30. [...] pulls off one of the finest pieces of reporting on the bailout. When I wrote The Media is Atrociously Bad at Prediction and I’m Sick of It,I highlighted how various business media point make bold predictions,get it completely wrong, and [...]

  31. [...] magazines, books, and TV predicts  what investments or investments and ’secrets’ will protect us in this uncertain economy. People are trying to figure out what to do with their [...]