As seen in Paragon’s second quarter 2008 print newsletter

Written by Dave Young

 

 

 

photo by Tom Hide

We’ve had several inquires from clients about the “inevitable” impending doom we face.

Opinions differ about the ultimate cause of this approaching economic meltdown.

–Some claim energy prices are causing inflationary pressures that will destroy us.

–Others worry that the economy is too slow and that deflation will be our downfall. Still others feel the budget deficit is creating an unsustainable drain on the economy.

These so-called experts may disagree about the causes, but the unified theme is that something bad is about to happen.

The media–print, television, the Internet–are the main sources of information for the average investor.

We read the newspaper in the morning with our breakfast, maybe check online a couple of times a day to see what’s going on in the world, and turn on the TV when we get home to watch the news. All of these information sources have become intertwined with our daily lives, and we trust that the information they provide is accurate and trustworthy. We have a tendency to assume we’re getting all the information we need to form good opinions about politics, tomorrow’s weather, and of course, our investments.

But it’s important to remember that the media companies are businesses. Their job is to make money, just like every other business. They all exist to make a profit, and their primary souse of revenue is advertising. The larger their audience, the more advertising revenue they can generate.

For investment-oriented media outlets, one of the best ways to attract a larger audience is to create a sense of urgency that taps into the two main drivers of investor psychology:  greed and fear.

That’s why the financial media focuses on stories about the next stock poised for huge gains (greed) and warnings of impending disasters (fear).

Articles with headlines like, “The One Stock You Need to Own Right Now,” or Five Stocks to Avoid” should tell you something about the tone the media is trying to establish. You certainly don’t want to miss out on “the next big thing.” Perhaps even more importantly, you don’t want to get caught making a big mistake.

Our observation has been that fear-oriented headlines become more common in shaky market conditions, whereas greed-oriented pieces usually show up more often when things are going well.

This approach isn’t good for investors. When markets decline, the media feeds on investors’ fears by emphasizing risks, because fear in times of uncertainty attracts views and subscribers. Unfortunately, selling after a rapid market decline is almost never a good idea. In other words, the fears fueled by the media after a market decline essentially encourage investors to do the worst possible thing:  sell when they should be holding or possibly even buying.

It’s important to understand we are not claiming that commercial media outlets deliberately lie. But, we are saying that commercial financial media outlets have a vested interest in making money, and as a result, they are not always the best source for complete and objective financial information.

So what do we recommend?

–Realize that much of the information you see in the media is not accurate. Often what you see is sensationalized. Why be depressed about how “bad” things are when it isn’t reality.

–Determine how “bad” or “good” things are based on your actual life experience, not what you see in the media.

–Never make investment decisions based on what you see in the press.

–As always, we encourage patience.

At Paragon, we receive data from many independent and reliable sources that do not receive advertising revenue, and then process it through our models which drive our investment process.

If you have any concerns about your investments with us, please call and we will evaluate how your portfolio is invested versus your individual risk tolerance. Feel free to call us at 801-375-2500 if you have any questions or concerns.

Second photo by Luisa