What Warren Buffett Isn’t Doing


By Dan Solin, Director of Investor Advocacy, The BAM Alliance


 

The financial media loves market crashes. They create fear and anxiety, which in turn increases their ratings. Ratings mean more revenue. The securities industry is a major source of advertising revenue for the financial media. And it has an economic self-interest in the dissemination of “advice” that causes investors to panic and dump stocks. More trading means more commissions.

The financial media serves these advertisers especially well during periods of extreme market volatility by circulating an endless loop of misinformation contradicted by an overwhelming amount of academic data. I seriously doubt Buffett pays any attention to it. You should follow his lead.

Terrible advice from pundits

Examples abound.

I seriously doubt Buffett is listening to the views of “one widely regarded investor” that the United States is likely already in a recession. His observation that “something massive is going on in the global economy and people are missing it” creates fear (which is its purpose) but ignores this issue: How likely is it that millions of traders all over the world, including the most sophisticated institutional traders, have missed any public information about the U.S. economy?

The commentator making this assertion may turn out to be right or wrong in his dire prediction. If he is right, it will be because tomorrow’s news is worse than expected, not because he has uncovered something others have missed.

I am confident Buffett is not relying on the meaningless musings of Art Cashin, who speculated the strong December jobs report is not necessarily indicative of a strong economy. Cashin believes the jobs number “is a little suspect.” Cashin is the director of floor operations for UBS. Do you think his claim has just a tinge of self-interest?

Trying to convince you to play the options game is a great way to generate commissions. A representative headline blares: “This could be the best way to bet on stocks now.” The author of the blog tells you that “it is remarkably inexpensive to make a bullish bet on stocks by buying on the options market.”

Really?

What this “advice” omits are these findings from a peer-reviewed study:

1. Call option returns are generally low.

2. Other than deep-out-of-the-money calls held for a month (which deliver lottery-like returns), all other calls deliver returns that are negative or not statistically different from zero.

The author of the study concludes: “I find a general and consistent result that Call option returns are low on average and decreasing in the strike price.”

But who cares? The commissions are great.

Sound advice

When markets tank, sound advice from the financial media about what to do is scarce. Evidence-based advice is boring. It doesn’t generate commissions. The financial media has a disincentive to disseminate it. Here’s what you should be doing:

1. Check your asset allocation (the division of your portfolio among stocks, bonds and cash). My colleague, Larry Swedroe, the Director of Research at The BAM Alliance (with whom I am affiliated), counsels investors not to take more risk than they have the ability, willingness or need to take.

2. Don’t engage in market timing. In order to be successful, you have to be able to get out at the low end and buy back in again when it looks “safe” to do so. Unfortunately, history tells us there is never a “safe” time to buy stocks.

3. Don’t assume the worst. There is a tendency to assume market declines will continue. This causes panic. The reality is that market prices today tell you nothing about the direction of the market tomorrow. Prices will increase if tomorrow’s news about perceived risks is better than expected, and decline if that news is worse than expected. No one has the expertise to reliably predict the direction of the market. Ignore those who claim this ability.

4. Stop relying on the advice of Wall Street stockbrokers. They have conflicts of interest they aren’t required to disclose. They don’t have to put your interests above their own. Most significantly, they have no demonstrated ability to “beat the market” through stock picking, market timing or fund manager selection. Instead, focus on the long term. I have no doubt that’s what Buffett is doing, based on this quote:

“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

 

This commentary originally appeared January 12 on HuffingtonPost.com



Dan Solin, Director of Investor Advocacy

About the Author

Dan Solin is director of investor advocacy for the BAM ALLIANCE. Dan is a New York Times bestselling author.

His latest book, The Smartest Sales Book You’ll Ever Read, was just released.

The author of several books on investing, his Smartest series includes:

  • • The Smartest Sales Book You’ll Ever Read
  • • The Smartest Investment Book You’ll Ever Read
  • • The Smartest 401(k) Book You’ll Ever Read
  • • The Smartest Retirement Book You’ll Ever Read
  • • The Smartest Portfolio You’ll Ever Own
  • • The Smartest Money Book You’ll Ever Read

In addition, he writes financial blogs for The Huffington Post and USNews.com. Dan is a graduate of Johns Hopkins University and the University of Pennsylvania Law School.


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