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.