By Jake Barach
Three investing experts’ opinions, a 74.8 percent climb, a 62.7 percent drop, multiple double-digit percentage intraday swings, several hundred PowerPoint slides and two and a half years, and Herbalife Ltd.’s shares currently trade less than 1 percent below their price two weeks before Bill Ackman began his public assault on the nutritional supplement company in 2012.
On Dec. 20, 2012, Ackman, a hedge fund manager at Pershing Square Capital Management LP, made public the details of his massive short on shares of Herbalife, sending prices down 9.7 percent on the day and 30.2 percent across four trading sessions. Within two months, Dan Loeb, founder of Third Point LLC, and Carl Icahn, founder of Icahn Enterprises LP, staked their bets on the long side of Herbalife shares. Since then, the three have written investor letters and made countless media appearances in order to defend their stance on the issue. Ackman’s failure to provide the “smoking gun” for Herbalife’s impropriety during his second, three-hour, widely-covered broadcast led to an 18 percent rise in the stock’s share price as he spoke July 22, 2014.
Though the average investor may not be sure who’s right in this situation, the swings in share prices indicate that they are clearly paying attention. The words and dollars of these three men have yet to bring to light the truth behind the company’s structural integrity and financial viability. Still, the media eye rests firmly upon them and their fellow elite investors in an effort to provide its audience with the coverage it desires, but not necessarily the coverage it needs.
“People shouldn’t be looking for reasonable financial advice for free on the Internet or their television. It’s simply kind of a ludicrous expectation,” said Jeff Macke, the founder of Macke Asset Management LLC. “But, selling ice cream is always going to be a better business than selling kale.”
The Herbalife case may be the sweetest ice cream to go on sale in recent years. In 2013, 13.8 percent of families held stocks among their assets and 94.5 percent held some form of financial asset, according to a Federal Reserve Board bulletin from September 2014. The average investor with a stake in equities and fixed-income mutual funds has earned a 1.9 percent annualized return during the past 30 years, writes Sean Hanlon of Forbes.
For this reason, it should be no surprise that investment “gurus” like Icahn, Loeb, Ackman, Leon Cooperman and Warren Buffett, who have amassed immense wealth through their shrewd and calculated stock picks, garner investor admiration. To see three of these titans go after one another, with hundreds of millions of dollars on the line, is as entertaining of an active management story as the media is going to get. There’s a highlight reel-esque New York Times timeline to prove it. But, boiling down investing into an easily digestible, “me versus you” scenario can undervalue the process that goes into assigning value to a stock.
Supply vs. Demand
Given the money at stake in, and the complexity of, the financial markets, people crave information, particularly seemingly lucrative information. Supply is valuable among this massive demand, but it is also a highly competitive space, said Macke. As with any business in search of financial success, outlets such as Bloomberg News, the Wall Street Journal, Fox Business Network and CNBC seek to provide customers with what they want. In a world dominated by financial jargon and massive institutions, recognizable, successful names often fit viewers’ tastes, and outlets are quick to comply and place these investors on a pedestal. This, however, may do more harm than good for the consumer.
Among this obsession with active management, it can become easy for the average investor to be convinced that they can and should be picking their own stocks, said Barry Ritholtz, (right) the founder of Ritholtz Wealth Management and a Bloomberg View columnist. This assumption comes despite the fact that the S&P 500 climbed 11.39 percent in 2014, and only 30 of the funds named on Bloomberg’s list of 100 top-performing large hedge funds generated a greater return on the year. Ackman’s Pershing Square International, which generated a 32.8 percent return, stands atop the list.
“Even if the investor can mimic what the pros are doing, so what?” said Ritholtz. “The guy who buys an index and puts it away is ultimately going to have lower cost, lower taxes and better performance. The only thing is, they have less to talk about at a barbeque or a cocktail party.”
Though outlets benefit financially from providing viewers access to the stars of the investing world, the relationship between the two is far from one sided. Stock picks, no matter how insightful, don’t pay off successfully unless other investors agree with the your position. As a result, most people with large stakes in the market want their voice heard, said Josh Brown, CEO of Ritholtz Wealth Management and author of “Clash of the Financial Pundits: How the Media Influences Your Investment Decisions for Better or Worse.” In the age of constant news cycles, this can cause confusion for the everyday investor.
“There’s a tremendous amount of noise and very little signal,” said Ritholtz. “You have to sift through all that noise to get through to the signal underneath.”
While the typical fund manager with an unrecognized name may court media attention and get a quote placed every so often, the outlets are clamoring for quotes from people like Icahn and Ackman, said Macke. This, in turn, provides these investors with a megaphone through which to convey their opinions.
What may, in fact, just be a particularly loud “noise” can easily be attributed as signal even in the face of limited evidence. In August 2013, for example, Icahn tweeted about his position in Apple Inc. and the notion that it was particularly undervalued. In 140 characters or less, and with the aid of a wealth of media coverage, Icahn helped shares of Apple stock rise in value by nearly 5 percent on the day.
Given his access to executives, his experience on company boards and his investing pedigree, it wouldn’t be shocking if Icahn’s statement was correct. Yet, whereas an everyday, skilled investor might see Apple as undervalued, purchase shares and then reap rewards as future investors come to a similar conclusion later on, Icahn is able to skip this process thanks to the coverage he receives and the attention he commands. He can generate profit nearly instantaneously. This influence on the markets is concerning, particularly when considering certain aspects of human nature that come into play in investing.
“There are a lot of examples throughout history where the public wants to believe that somebody can give them certainty about the future,” said Brown. “We put the guy who was just right about something on the pedestal just about every time. We almost never learn.”
The subscription to this hot-hand fallacy means that someone such as Icahn, who is often “right” simply as a consequence of having his past and his ideas becoming highly visible, is unlikely to relinquish his influence. Viewer confidence in his ability to pick stocks perpetuates the need to cover him among outlets. This coverage sways investor sentiment, generates profit for Icahn, has investors clinging to his every word and keeps the cycle going.
Despite the criticisms, the business world possesses a massive influence on our everyday lives. Forbes’ 2014 list of billionaires included the names of 1,645 people that have the rare, and enviable, honor of requiring at least 10 digits to describe their wealth. At Forbes, the coverage of individuals is largely limited to their impressive number and a short blurb about how it grew so large. At Bloomberg Billionaires, Peter Newcomb, an editor on the desk, and his team work to piece together the math and the stories behind the fortunes of the world’s wealthiest people.
“The way we look at it, by covering these guys, you’re covering the ultimate movers and shakers of the global economy. These guys have their hands on every aspect of the economy, whether it’s the international markets, the clothes you wear or the food you eat,” said Newcomb. “It’s hard to leave your house and go about your day without half a dozen billionaires’ fortunes getting in your way.”
The value in Bloomberg Billionaires differs significantly for those that pay upwards of $20,000 a year for a Bloomberg terminal and those who peruse the website for free, said Newcomb. The terminal users, who tend to be deeply engaged with the financial markets, turn to the desk’s work to understand how the world’s wealthiest are deploying their capital and steering their investments, he said. On the site, however, the interest is much more on par with financial porn, as readers seek an inside look at the lifestyles of the fabulously wealthy.
Some, like David Geffen, who embarked on his path to riches as the co-founder of Asylum Records, will happily speak on background and provide guidance as to how they’re investing, said Newcomb. Donald Trump, on the other hand, is Newcomb’s go-to example for someone who has a tendency to be too helpful and embellish his holdings. Still, the issue of self-promotion on the part of the billionaires resonates. Despite the range of cooperation, there is one consistency that invokes similar concerns as those regarding investment “gurus.”
“Most don’t really want to cooperate on reporting their wealth because they’re not that interested in that,” said Newcomb. “They are interested in their deal making. So, if you’re really covering their business, that’s something they’re more inclined to cooperate with.”
Ultimately, it’s difficult to tell how big of an impact the financial media and its coverage of investment gurus has on the ways in which its consumers invest. A general and costly misconception about the analyst reports, stories and charts that investors “research,” however, is that they can help someone vet which stocks are worth buying, said Ritholtz. The semi-strong form of the efficient-market hypothesis suggests that share prices incorporate and reflect all relevant, publicly available information.
“Unless you’re getting market moving news before everyone else, what is the advantage of reading something that’s in Barron’s, the Wall Street Journal or the New York Times if the rest of the investing world is acting on it?” said Ritholtz. “Whatever strategic benefit there is to gain from this information is lost in the fact that everyone has access to it.”
Even if investors attempt to consume financial media as a means of gauging the economic environment, rather than handpicking stocks, the impact of the recency effect, or the tendency to focus only on the most recent data points, on writers and financial media consumers can be detrimental to this effort. Markets need to be understood across time, thus analysis of a stream of data points, not a singular mark, is necessary to come to meaningful conclusions, said Ritholtz.
“A couple of years ago, CNBC used to have a clock countdown to non-farm payrolls. I don’t remember if it was tenths of a second or hundredths of a second, but it was just absurd,” said Ritholtz. “It isn’t Usain Bolt. It’s non-farm payroll, and it’s going to be adjusted next month anyway.”
This disdain for the sound bite genre led Ritholtz to create “Masters of Business,” a podcast in which he sits down for an hour with players across various industries. Instead of discussing stock picks, however, the discussions tend toward the guests’ varied expertise. Brad Katsuyama, the CEO of the IEX dark pool and protagonist of Michael Lewis’ “Flash Boys,” discussed dark pools and high frequency trading. Bobby Flay spoke on the business of the Food Network. Even here, there is some self-promotion, though it may come with a more educational tilt. This format is synchronous with Ritholtz’s belief that an investor must have a diversified set of expertise in order to be effective, but, for better or for worse, it is not conducive with the direction media is going in, said Macke.
“If you have the luxury of having a longer cycle and viewers that want to pay attention to you for 60 minutes, and you’re happy with that niche, that’s fine,” said Macke. “For the people that are craving an audience, we’re going to a three minute sound bite type of future, and you better embrace it and figure out how to be relevant in that genre.”
Though there may be flaws in financial media and the ways in which people consume it, there is no denying that it adheres to supply and demand economics, said Macke. The average investor is putting his or her money at substantial risk in an environment that is hard to fully comprehend and even harder to predict. The constant stream of speculation, data and coverage may not be worthy for investment advice, but it certainly plays a major role in comforting investors and enabling them to understand the ins and outs of the corporate and financial worlds. The business media outlets capitalize on this need, and the glut of competition has demanded that they continue to adapt the way in which they do so.
Big time investors may command more control and attention within the markets than they should as a result of the way business media’s relationship with its consumers has developed, but it’s only natural. If you’re a competitor, and everyone invested in the stock markets is to some extent, you pay attention to those that compete best.
Jake Barach is a junior at UNC-Chapel Hill studying business journalism. He interned at Bloomberg News in the summer of 2013.