Using the media as a quick and dirty sentiment indicator

April 1st, 2007

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How useful are the mainstream news media to your investment endeavours? It depends on what you use them for. If you draw on them for obtaining news, information, raw facts and figures, we guess they are generally (though not always) reliable, especially from the ones of good brand and reputations. But if you read them to acquire wisdom, critical analysis and education, you are most likely to be better off without them. The greatest challenge lies in distilling the objective information from its complex entanglement with biased opinions, misinformation and propaganda. It is not that the news media are deliberately dishonest. Rather, it is because they can be easily manipulated to co-opt ideas from others who have different agendas or bias. On the other hand, whenever they appear objective, it is often the result of seeking contradictory and conflicting opinions from different market participants, which makes their objectivity useless for making decisions.

However, we find there is another good use for the news media?as a quick and dirty sentiment indicator. Since they are also in the business of making profits, they have to give their consumers what they want. Therefore, they will want to produce stories that are very much aligned with the strong emotions of their readers. In other words, they have to tickle the ears of their readers to remain profitable. For example, in times of raging bull market (such as now), you will seldom find any mainstream news media that present doom and gloom stories that run against the grain of the mob?s exuberance. Conversely, in times of great pessimism, you will seldom find them presenting sunny stories. In short, the news media often reflect the sentiment of the mob.

Yes, we do read the mainstream financial news media not mainly for enlightenment. Instead, we do so to find out what the crowd is thinking and feeling. This is where we, as contrarian investors, find worth in the mainstream news media.