TV Tune-Out

Mar 17, 2007 by

In my last entry, I asked you to pose questions. Shannon asked, “Which television analysts give the best recommendations and which just blow a lot of hot air?”

I like to try to give timeless advice and to not name names or point fingers, but I would like to address this nonetheless. A lot of television analysis is entertainment, and should not be used as the basis for an investment decision without first giving it a bit of additional thought.

In general, the price of a stock will rise if the expectations of the future performance of the company improves. Any television analyst who suggests that you invest in a stock based upon something that happened in the past is just trying to fill airtime. For instance, imagine Benjamin Bucks saying, “You should buy Acme Corp because it announced last month that its 2006 sales were double its 2005 sales.” What is wrong with this analysis? The price of Acme Corp’s stock likely rose as soon as people became aware of the factors that were increasing its sales. Once people began to expect a higher level of sales, they priced the stock accordingly. By the time Benjamin Bucks has made his statement, the statement is a fact that is incorporated into the current price of the stock. The price should only go up if the performance of the company improves more than the market currently expects that it will improve.

It is not always clear how to balance your diet while watching TV. Imagine if you ate a diet that consisted of all of the food recommendations you saw on television. Your diet would probably consist largely of cereal and candy bars, with perhaps a few soft drinks and Florida orange juice mixed in. When was the last time you saw an advertisement for lettuce? Just as it is inappropriate to consume food in the variety and proportion in which food is presented on television, it is inappropriate to buy stocks whenever someone on television recommends them. Television commentators are in the business of getting people to watch their shows; not in the business of maximizing your portfolio returns. Thus, the entertainment value of covering a company on a show is likely to be as large a factor in mentioning it as the financial value of investing in it. Furthermore, “nutritional requirements” vary from individual to individual. Some stocks (particularly ones that are likely to have higher variance, but higher overall returns) are more appropriate for young people than older people. There is no one-size-fits-all portfolio. In order to craft a portfolio that meets your personal needs and risk profile, it is best to consult a certified financial advisor, or to extensively research the matter on your own.

Consider the value of television analysis, in general. I do not watch live television. Period. The average television hour consists of 43 minutes of content and 17 minutes of advertisements. Thus, you are learning for less than 75% of the time you spend watching TV. Furthermore, many of the topics covered may be of little interest to you, and the topics that are of interest to you are likely to be covered superficially. When something important is mentioned, the facts do not remain in front of you, in print, for future reference. Due to all of these issues, I obtain my news exclusively from the Internet. Almost all of the television commentators maintain websites that contain their picks and advise, albeit displayed in far more manageable written form. When learning about the market via the Internet, it is far easier to find more in depth analysis on a topic than it is while watching television. Likewise, it is easier to find multiple viewpoints. I think that the television commentators were important before the rise of the Internet, as they gave people access to a real-time ticker and current news coverage; two features not found in a newspaper. Now that real-time stock quotes and late-breaking news are available online, television-based commentary is obsolete for all but entertainment purposes. (I must admit that I do enjoy watching while I’m at the gym.)


  1. Fred

    I think you’re right on in your analysis of the (lack of) value of these commentaries. The only thing I’d add is that there’s an opportunity for contrarians to take advantage of the fact that a lot of uninformed investors will slavishly follow the recommendations given by the pundits.

  2. Padmanabha Kamath

    Yes, I do agree with you that people are mostly misguided to follow the advice of TV anaysts (I personally find Jim Cramer horrifying).

    I mostly follow TV analysts if they agree with or contradict my feeling about a particular company. For eg. if someone agrees with me that AMX (American Express) is undervalued, I would look into his analysis to see whether he has something to substantiate it that I haven’t already seen.

  3. Marlon Reis

    I appreciate your warning concerning the need to discern between differing view points from TV analysts. I myself find it very important to research a topic on your own and come to a conclusion based on your own findings, not what you are told about the thing. This applies to all areas in life, not just business, and is a valuable lesson. People would be surprised I think by what the media holds back from the airwaves.

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