Questioning What You Read, Hear and Watch
publication date: Aug 16, 2011
I've written extensively about how the news media is dependent upon advertisers (this is especially problematic online). But the media suffers from an even larger potential problem.
Too many reporters, journalists, etc. lack sufficient expertise (and time) to do a thorough and informed job when they cover personal money topics. And, these folks are under tremendous pressure to meet short-term deadlines and to entertain and bring in viewers. All of this can lead to significant errors and inaccuracies in stories or segments. These errors are often introduced from sources that the news media utilizes but don't sufficiently check out. This often happens and I regularly find major errors in news reports. Here are two examples that I came across in just one week a number of years back.
Stocks Flat Over Five Years
A multi-billion dollar investment firm sent out a stock market commentary in September, 2006, just after the five year anniversary of the September 11th terrorist attacks. In it they said:
"What has been most surprising in the past five years is how strong corporate earnings have been relative to a decent economy and how little that strength has helped propel U.S. equities. For the past three years, in fact, earnings for the S&P 500 have registered double-digit growth (with that growth - contrary to most market expectations - accelerating in 2006), while the major indices have been flat."
I did a double take when I read the last sentence, "For the past three years...the major indices have been flat." I couldn't believe that was even close to being true. The stock market took a drubbing in the early 2000s but had a major rebound beginning in early 2003.
Before leaping to any conclusions as to the accuracy or lack thereof in this commentary, I wanted to get the facts about the stock market's performance over the three year period through the issuance of this commentary in September of 2006. Here's what I found for the cumulative three-year returns for the major stock market indexes:
Total U.S. Stock Market Index 44.6% (13 percent per year annualized)
Total International Stock Index 86.5% (23 percent per year annualized)
So, you can clearly see that this firm's statement that stock prices had been flat the prior three years was incredibly wrong and off base. Since the stock market averages returns of about 10 percent per year, stocks worldwide produced returns well above average, especially overseas.
I couldn't believe such a large investment firm could be so clueless. The only possible agenda that I could see was that if their investment portfolios hadn't been faring well, they were trying to make it sound like the overall stock market had been treading water and going no where so their clients wouldn't feel like they were missing out on a party. When I examined their companies mutual funds' investment performance, I found that their domestic stocks funds, which carried a relatively steep average expense ratio in excess of 1.5 percent annually, had underwhelming and mediocre risk adjusted returns. They did not offer diversified foreign funds, which meant that their clients missed out on the strong performance overseas.
Wanting to understand why they would publish such an erroneous report, I called this investment firm. I tried them several times in fact and no one called back. I made one last attempt to call and finally got called back -- more than one month after I originally contacted them. The principal who called me fumbled quite a bit when I asked him to explain the sentence that said that stock prices had been flat over the three years prior to the commentary in question. He first said that he was not able to publish as many commentaries as his firm would like because of all of his responsibilities. He then said that that what they were really trying to say was that since January, 2004 (which was less than three years from the report's publication) the market hadn't gone anywhere. Lopping off the last quarter of 2003 did erase a strong up period for most stock markets worldwide but the major indices had still increased significantly using January 1, 2004 as the starting point (remember that these returns are over just two and three-quarter years):
Total U.S. Stock Market Index 28.7% (10 percent per year annualized)
Total International Stock Index 59.0% (18 percent per year annualized)
So, even despite this manager's attempt to spin out an explanation, he was still way off base. Even allowing him to say that he really meant performance since the beginning of 2004, stocks during the ensuing period did as well or better than they have historically.
Wages Have Remained the Same
Here's another example - this time from a press release - with problematic assertions and data. A firm that provides information to consumers seeking to get out of consumer debt made the following statement in a release they sent out in the fall of 2006:
"The number of homeowners spending at least 30% of their gross income on housing grew from 27% in 2000 to 35% in 2005. For renters, it increased from 37% in 2000 to 46% in 2005. At the same time, wages and income have remained the same."
I underlined the last sentence which is asserting that during the five-year period from 2000 through 2005 people's wages and income did not grow at all. I was sent this press release via email so I highlighted the paragraph and sentence in particular and sent it back to the firm's president asking what data supported this statement.
Here's the response that I got back:
"Thanks for your note (pasted below) the other day. I thought I'd send you a previous press release we did, which stated (in the third paragraph) that the median family income is now $43,200 which represents only a 1.6% increase in the past five years. I hope that answers your question that you posted below. If you have any other questions, we would certainly like to answer them."
I went to the Federal Reserve report cited as the source for this data in the press release. Here's my response back after I examined the data in that report:
"Well, it states that over the period 2001-04, the median value of real (inflation-adjusted) income rose 1.6 percent. So, it's not flate over five years and it went up even after adjusting for inflation. Your original statement which I questioned would appear in error."
Disappointingly, I got no further response. No correction was sent and this erroneous information appeared and was repeated in many publications and news reports.
All the News That's Fit to Print (and Then Some!)
Everyone makes mistakes. But it's troubling when inaccurate releases are sent to the news media or information is conveyed to the public and those who are responsible make no effort to correct clear errors. It's disturbing how many news' media outlets will run with something given to them without verifying its accuracy.
By all means, be a consumer of financial news. But, be a skeptical consumer. Don't blindly accept news as factually correct and unbiased. Learn what sources to trust and which to sidestep. A big part of what this website helps you to do is deciphering the news and separating the best resources from the rest.