Is Financial News Reliable?

The financial news industry is a behemoth, a relentless machine churning out a constant stream of information, analysis, and predictions about the market. But amidst all of this, how much of this information can we actually trust? 

Is financial news truly a reliable guide for traders and investors, or is it a carefully crafted narrative designed to serve other interests?

The truth, as is often the case, lies somewhere in between. 

While there are certainly reputable sources of financial news that strive for accuracy and objectivity, the industry as a whole is plagued by inherent biases, conflicts of interest, and a tendency to prioritize entertainment and engagement over enlightenment. 

Let’s look deeper into some of the key issues that cast a shadow on the reliability of financial news.

Key Takeaways – Is Financial News Reliable?

• Financial news often fabricates narratives to explain market movements, attributing changes to external factors without understanding the real causes.
• For example, a junior trader’s accidental trade manipulated oil stock prices, which was misinterpreted by pundits as a geopolitical reaction.
• Prominent pundits, including those like Jim Cramer, rely on past successes and their entertainment value as a pundit to sell unreliable advice, often performing no better than random guesses.
• Media perpetuates selective reporting and amplifies specific personalities, overlooking their frequent errors to maintain viewership.
• The systemic structure of financial media is criticized for aiding Wall Street by misguiding retail investors, enabling wealth transfer from the public to sophisticated traders.
• Some pay to be on the networks, with marketing cloaked as expert commentary or interviews.
• Those with a genuine edge on the markets usually don’t say much.

The Illusion of Explanation: Narratives Fabricated in Hindsight

One of the most pervasive problems in financial news is the tendency to create narratives after the fact. 

When the market makes a significant move, whether it’s a sudden surge or a dramatic plunge, commentators are quick to offer explanations, attributing the change to various external factors. 

These narratives, often woven with a compelling blend of economic data, political or geopolitical events, and/or corporate announcements, create an illusion of understanding, making it seem like the market’s behavior is perfectly logical and predictable to them – and even simple.

However, the reality is far more complex. 

The markets are dynamic and chaotic systems, influenced by a multitude of factors, many of which are impossible to predict or even fully understand. 

Any single human will never have a rich understanding of all the variables involved even if they’ve dedicated their life to it and performed at a high level.

Attributing a specific market movement to a single cause is often an oversimplification, a convenient narrative that ignores the underlying complexity.  

Imagine a giant anthill, with tens of thousands of ants scurrying around underneath the surface, each following its own individual path. 

Now imagine trying to explain the overall movement of the anthill based on the actions of a few individual ants.

Some of them will be more active and influential on its movement than others, but it’s more complex than that.

It’s an impossible task, yet that’s essentially what financial news often attempts to do with the market.

The Accidental Oil Trader: A Case Study in Misinterpretation

A perfect example of this phenomenon was the story of a junior stock trader who accidentally moved the market. 

This trader mistakenly placed a massive order for certain oil stocks, far exceeding the intended trade size. 

This unexpected surge in demand caused the price of these oil stocks and oil ETFs to spike.

Moreover, markets are connected. If oil stocks increase in value, that directly impacts the price of oil as well.

So, now there’s the need to “explain” why oil moved.

Financial news outlets, eager to explain this sudden price movement, immediately jumped on the bandwagon, attributing the surge to geopolitical events, such as tensions in the Middle East. 

However, the truth was far less exciting. 

The real cause of the price spike was a simple human error, a “fat-fingered” trade that had nothing to do with geopolitics, global economics, or the specifics of the oil companies. 

This incident highlights the danger of relying on financial news for explanations of market movements. 

The narratives presented are often compelling, but they may have little basis in reality.

The Credibility Crisis: Pundits, Predictions, and Performance

Another major concern with financial news is the credibility of its purveyors.

Many prominent financial pundits, particularly those on television, have built their careers on their supposed ability to predict the market and offer sound investment advice. 

However, there’s often a less impressive reality.

Take Jim Cramer, for example, the boisterous host of CNBC’s Mad Money. Cramer is known for his energetic stock picks and his confident market predictions. 

However, studies have shown that Cramer’s stock picks often underperform the market, and his predictions are no more accurate than random guesses.  

As the Wind Blows…

Moreover, the picks typically follow a “positive feedback” approach.

In other words, if something’s been doing well, he’ll speak positively or recommend it.

If it’s done poorly, he’ll be less optimistic and even tell his viewers that he’s avoiding it.

That way it looks like he’s in the “good stuff” and out of the “bad stuff.”

So what he’s saying seems right and can convince people.

Entertainment Over Accuracy

Despite this, Cramer remains a popular and influential figure in the financial media. 

His continued popularity shows the prioritization of entertainment over accuracy. 

Many viewers tune in to Cramer’s show not for sound investment advice, but for the entertainment value of his bombastic personality and his theatrical stock picks.  

This focus on entertainment can lead to a distortion of information. 

Pundits may be more likely to make bold and controversial statements, even if they lack evidence to support them, simply to attract viewers and generate buzz. 

This can create a misleading picture of the market, where hype and speculation overshadow factual analysis.

The Echo Chamber Effect: Amplifying Voices, Ignoring Errors

The media’s tendency to amplify certain personalities, regardless of their actual track record, further exacerbates this problem. 

Once a pundit gains a certain level of prominence, they attract an audience that believes them, and their statements become trusted. 

This creates an echo chamber effect, where the same voices are constantly amplified, while dissenting opinions or critical analysis are often ignored.

Moreover, the media often overlooks the frequent errors and misjudgments of these prominent figures. 

When a pundit’s prediction proves wrong, it’s often brushed aside or explained away. 

This creates a false sense of infallibility, leading viewers to believe that these pundits have a special insight into the market, when in reality, they’re often just as clueless as everyone else.

If they’re looking to invest in the stock market, an index fund is almost surely going to be a better fit than their stock recommendations.

Especially with the transaction costs and time invested.

The Collusion Question: Is Financial News Aiding Wall Street?

Critics argue that the financial news industry is structured in a way that benefits Wall Street firms at the expense of retail investors. 

By disseminating misleading information and promoting a culture of speculation, the media helps to create an environment where the most sophisticated traders can exploit the public and extract wealth from them.

This alleged collusion takes many forms. 

For example, financial news outlets often rely on Wall Street analysts for their information and insights. 

These analysts, however, have a vested interest in promoting the stocks of the companies they cover, as their firms often have investment banking relationships with these same companies. 

This can lead to biased reporting, where positive news is amplified and negative news is downplayed.  

Furthermore, the media’s focus on short-term market movements and its obsession with “hot stocks” can encourage retail investors to engage in risky trading behavior, chasing quick profits rather than investing for the long term. 

This plays into the hands of professional traders, who can use their knowledge and resources to exploit these impulsive trades and profit from the volatility they create.  

While some would just say this is a conspiracy theory, there’s certainly evidence to suggest that the financial news industry is not always acting in the best interests of the public.

Some Pay to Be On the Network

Some individuals and companies actually pay to appear on financial news networks. 

This happens in a few ways:

• Sponsored segments – Companies may pay for segments featuring their products or services, often disguised as interviews or expert commentary.
• “Experts” with agendas – Some guests who appear as objective commentators might have undisclosed financial interests in the companies or topics they discuss.
• Paid placements for “breaking news” – Companies can pay to have their press releases or announcements featured as “breaking news” segments.

These practices raise ethical concerns about transparency and objectivity in financial news.

Viewers should be critical of the information presented and consider the potential motivations behind the guests and segments featured.

Those With a Genuine Edge Aren’t Likely to Say Much

Having an edge means you have information or insights that others don’t. 

Usually, when there’s a consensus in the market, it gets priced in and believed. 

This happens because when almost everyone agrees on something, they start making decisions based on it. 

Even a small disappointment can catch people off guard and lead to reversals. 

If you share your recipe, everyone can make the same cake, and soon your cake isn’t special anymore.

The same thing happens in trading and investing. If you have an edge and you share it publicly, pretty soon, others will be doing the same thing, and your statistical edge disappears. 

That’s why those with a genuine edge in the market aren’t likely to say much publicly. 

But there’s another reason too. It’s not just about what you know, but also about what you don’t know. 

If you’re too sure about your strategies or edge and you share it publicly, you might start believing your own hype. 

You might forget to question your own assumptions and adapt when things change. 

In fact, if you change your mind, then what you recently said is outdated and it’s like you’re misleading people.

And in trading, things always change. So, keeping quiet about your edge helps you stay humble, adaptable, and focused on what’s important.

Finding Reliable Financial Information

So, where does this leave us? 

If financial news is so unreliable, how can traders and investors find accurate and trustworthy information to guide their decisions? 

The answer, unfortunately, isn’t simple. There’s no single source of truth in the financial world, and even the most reputable outlets can be prone to bias and error.

There are nonetheless some steps traders can take to improve their chances of finding reliable information:

• Diversify your sources – Don’t rely on a single news outlet or pundit for your information. Read a variety of publications, listen to different perspectives, and be wary of anyone who claims to have all the answers.
• Focus on facts, not opinions – Be skeptical of predictions and market commentary. Look for news sources that prioritize factual reporting and data analysis over speculation and hype.
• Consider the source – Pay attention to the potential biases of the information source. Is the analyst affiliated with the company they are covering? Does the news outlet have a particular agenda?
• Develop your own critical thinking skills – Don’t blindly accept everything you read or hear. Question the information, analyze the data, and form your own conclusions. Accepting you don’t know and can’t know is often the most genuine thing you can do.
• Consult with a financial advisor – If you’re unsure about how to interpret financial news or make investment decisions, seek professional guidance from a qualified financial advisor with the proper training and credentials.

Ultimately, navigating financial news requires a healthy dose of skepticism and a commitment to independent thinking. 

By being aware of the potential pitfalls and biases, you can make more informed decisions and avoid being misled by the noise.

Related: How Fast Is News Integrated into Prices?