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OPINION / How to ignore, or use, bad press about the economy By Doron Tsur, TheMarker Tags: Press, Israel, Corruption The press plays a huge role in modern society. It brings the public information and analysis, and has become a central tool in the public debate. Leaders and public figures must consider the media when making decisions. The printed word has also often been a shield protecting the people against misdeeds, corruption and humdrum stupidity among the people in power. The financial press naturally plays a similar role, especially the pages devoted to investments. However, its power and influence over readers, and over events in financial circles, are greater than all other sections of the paper (or other Web sites, for that matter). Why is that? Because most other sections of the paper may help shape opinions, but the reader doesn't have to, or can't, make active decisions. Advertisement The average reader of columns devoted to foreign affairs and security may decide whether he is for or against Israel's prisoner swap with Histadrut, or if he or she supports exchanging territories for peace. But the reader isn't actually making a decision. At most the average reader can affect events indirectly, even very indirectly. Go out and demonstrate, for instance. Readers of the sports columns may form an opinion about this or that team, and whether a given soccer star should focus on defense or offense. But there's nothing he can do about the choices of the team composition or the coach's decisions on strategy in the game. In investments (and in consumer issues), on the other hand, the reader does more than form an opinion: He makes decisions. If many readers are swayed in a given direction, then the press report isn't only describing a phenomenon, it's exacerbating it, sometimes significantly so. Let's take an example from the world of consumer affairs. Today it seems downright bizarre, even preposterous, but just four months ago, the world press was reporting a worrying shortage of rice. You must remember how the worldwide rice crunch made the front pages, accompanied by photographs of empty shelves at supermarkets. Naturally, the reports sent panicked consumers terrified of being caught without rice, storming the stores. And thus we receive a model of self-fulfilling prophecy. The expected shortage led people to hoard. Shelves did empty. Other buyers panicked and bought another kilogram or two or 10 to be safe. The rush did create a temporary shortage and rice prices soared. More dramatic headlines appeared on the front pages leading to more panicked buying and greater shortage. It had to stop somewhere and quickly enough, life returned to normal. Happily, the damage to consumers was relatively minor. A few merchants took advantage of the panic to jack up prices and earned a bit more at the expense of consumers, who got stuck with kilos of rice stuffing their cupboards. The case of the rice demonstrates how the press affected consumer decisions, exacerbated an existing phenomenon and distorted the price of a product. But there are instances in which the damage caused by media coverage can cause far worse damage. In the case of investment decisions, the price of the media's influence over investor behavior can be much heavier. Sometimes major money is at stake. In the late 1990s, for example, you couldn't escape the endless stories about the new high-tech millionaires. The coverage served to inflate the dot.com bubble on Wall Street. Much the same happened to the residential real estate market in the U.S. For years the American business press dwelled ceaselessly on people who made a fortune from buying and selling houses. The endless reports influenced a lot of people, who made decisions that inflated the real estate bubble, until the inevitable end. The financial markets fluctuate between poles of rationality (decisions based on facts, numbers and risk-reward analyses) and emotionality (making decisions based on feelings, usually fear and greed). The financial press has its rational sides too. You'll find articles on analyses based on numbers and facts. But, as is only natural, there will also be a lot of pieces that affect the reader emotionally, mainly during bear markets. That is simply because headlines along the lines of "Horror in the markets" or "Storm batters oil stocks" or "Rice shortage looms" attracts the reader a lot more than headlines suggesting that "Yossi Shoes multiple climbs by 3.42%." That is boring. "Sweating blood" is better for circulation than "Ebitda slips." In a bull market you're likely to see the bovine beast with headlines that announce "Stocks soar." During pullbacks, you'll see the bear with equally risqu? descriptions. A stock market reporter will naturally focus on the major movers on a given day, not on the ones that tread water, but the use of extreme verbs (soar,plunge) instead of emotionally neutral ones (rose, fell) turns the press into a giant mood amplifier. That amplifier can cause naive investors no little harm, in both directions. During booms, the naive investor may buy assets at inflated prices, ignoring the risks. Come the bust, the naif may sell in a panic, getting too little for his shares. I remember during the panic of the mid-1990s, that frightened savers were withdrawing billions of shekels from provident funds that were invested in Israeli government bonds linked to the consumer price index, or in stocks that were trading very cheaply following the bust of 1994. The press waxed bombastic as usual ("The public is abandoning the funds." The headlines, combined with the short-term losses, exacerbated the effect.) Past imperfect Media coverage also amplifies what Warren Buffett calls the "rear-view mirror" effect. Investors are driving forward (because that's how the timeline moves) while looking in the rear-view mirror. Good times draw in investors who are looking at past equity performance and extrapolating to the future. During bad times, they look in the rear and figure the trouble will continue. In both cases, it's a bad idea. Past performance is no guarantee and sometimes little guide as to what will happen in the future. So what can an investor do to squelch the background noise of the media, which like it or not, affects all to some degree? One possibility is to boycott the financial press. You can design a long-term investment strategy that suits your needs and the sail along ignoring your portfolio for years. There are advantages to that strategy, but not many can handle it. Another possibility is to develop awareness of how the media impacts your feelings and thoughts, and how it affects the investment world around you. Be aware of how the press can influence decisions. It isn't easy. It is human to be affected by herd movements. You have to strengthen and heed your rational side, that place of figures and facts not affected by mood. It will take more effort but generally, in the long-term view, should justify itself. Meanwhile, if dramatic media coverage amplifies phenomena in the financial markets to the point of stretching prices beyond reason, then sectors that attracted "bad press" could be havens of opportunity. I can think of two sectors like that offhand that have been deluged in negative coverage. One is the financial sector. Some finance sector stocks crashed for good reason but there are also shares that offer alluring risk-reward possibilities. In Israeli financial market circles, ungraded corporate bonds have been suffering from negative sentiment for months and the massive selloff by investors was exacerbated by the press, which highlighted the risks in such paper. No question about it, these risks are real and some will manifest. But the press has skipped lightly over the opportunity that these bonds also proffer, namely the potential of double-digit returns. That doesn't mean quick returns, by the way; nobody can say when the trend will turn. Sometimes negative sentiment can last a long time, and get worse en route. But acting against the trend has shown in the past that it can pay off. The author is the CEO of Compass Investments. 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