Talking Heads

Financial data reported by mainstream media were once mercifully simple and brief. Reporters might tell us that interest rates had risen a quarter of a point, or that the unemployment rate had dropped a tenth of a point, or that the dollar had risen slightly against the German mark. But now, even on general news segments, we are bombarded with details once considered too technical even for seasoned financial industry professionals.

I watched recently as one of television’s talking heads reported that although the monthly trade deficit had dropped, the movement should not be interpreted as a positive sign. Why? Because export figures contained a large commercial aircraft shipment that markets had known about for months in advance. Another correspondent told me that the rise in the wholesale price index should be discounted heavily, because 34 percent of it was attributable to movements in traditionally volatile energy components of the index.

Online, the data-dump only deepens. Go to any other major financial services site and you’re hit with market minutiae that few people could possibly have command of: every market index from “real-time analysts” and every public filing issued by the Securities and Exchange Commission.

We have the Internet to thank for the fact that all of that information is now available 24 hours a day. But how much of it is actionable? Do ordinary citizens really need to know about this stuff? When we learn that durable goods inventories were expected to rise 2.2 percent but actually rose only 2.1 percent, what, exactly, are we supposed to do? Since it’s hard to imagine how such information might help us with the day-to-day decisions we confront as consumers, why are the major media outlets bombarding us with so much detail?

The obvious answer is that a growing number of us are no longer merely consumers. Almost half of American households now invest in the stock market, up from only 25 percent in 1983, and millions of us actively trade shares over the Internet.

In the process, many of us have reaped astonishingly large windfalls. Someone who bought $10,000 worth of stock just three years ago now owns shares worth almost $1 million. Some investors I know seem content to trust their hunches and luck, but most seem to be hunting for an edge. Some read biography, trying to fathom the talents and motivation of corporate leaders. Others study emerging technologies. Many even try out products firsthand before buying stock in the companies that make them.

Millions of other investors, however, find such strategies hopelessly subjective. And in a country that has long been obsessed by baseball statistics, it is little wonder that these investors seek guidance from cold, hard numbers. Batting averages and price-earnings ratios have a clean, objective quality. That they can be compared to the fourth decimal point if necessary lends them a veneer of precision that many find irresistible.

What’s troubling is that our obsession with such numbers is almost surely a waste of time and effort. Economists disagree about many things, but one belief we share is that ordinary investors can almost never make financial headway by trading on the basis of information they receive through the media. It isn’t as if new information has no effect on stock prices. It’s that relevant information changes prices before most of us ever even hear about it.

Suppose you hear on CNBC that Amazon has just reported losses of $32,868,254 on revenues of $447,878,043. Can you make money by rushing to buy, or sell, stock in Amazon on E*Trade?

Not likely, once you consider that the new numbers are valuable only if you can interpret them more quickly and intelligently than other investors can.

Literally thousands of other investors, most of them much better informed than you, have been following the operations of Amazon and its competitors for months. Most had good forecasts before the numbers themselves became available, and most learned the actual numbers many hours before they were reported on CNBC. Each of these investors was just a click away from moving large blocks of shares the instant each new detail became known. Someone, surely, will gain from the new numbers. But it won’t likely be you.

The puzzle is that despite the longstanding insistence of financial economists that individual investors’ best strategy is to put their money in an index fund and let it sit there, millions of new individual investors each year seem to feel sure they can do better by actively managing their own portfolios.

In part, this may be explained by the relentless optimism of the human spirit. The great majority of Americans consider themselves to be above average. And more than 90 percent of American drivers believe themselves to be more competent than the average driver.

The cold truth is that we are not all above average. If more of us realized that and adopted a buy-and-hold investment strategy, the TV networks and print media could free up large blocks of time and space for news of genuine interest. In the meantime, those of us with little knowledge of arcane data from the business world may soon find ourselves as unwelcome as conversation partners as those who don’t know who’s ahead in the latest McGwire-Sosa home run contest. But we might still be beating the S&P 500.