It Could Happen to You

Story Highlights:

• The media has a propensity, and incentive, to report what might happen.
• But because just about anything could happen, these reports offer little insight and often steer folks in the wrong direction.

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In the days leading up to the landfall of Gustav, media headlines were chock full of what might happen to New Orleans. The storm could come ashore as a level 5 hurricane. Levies might fail. It could be Katrina all over again.

Thankfully, as we know now, New Orleans was spared. But because folks living anywhere near the Mississippi Delta know what might happen when a hurricane comes ashore, warnings of potential threats have the power to grab their attention. The media, of course, has figured this out and are already on to what might happen next time.

Warnings about severe weather can be very useful. But rarely is the same true when it comes to investing news. Anyone with a stake in financial markets has likely been frightened at one point or another by the headlines—especially in years like this one. The real terror, though, is when worries and potentialities are reported as facts. Here's an example:

"On the current trend line 60% of the world will be in recession next year. It's gone so far now it's probably impossible to stop."
- International Herald Tribune, September 18, 1998

For the record, 1999 went on to be a fine year for the global economy and for markets.

Predictably, the media has taken advantage of this year's volatility by worrying aloud whether woes in the financial sector, high gas and food prices, and housing weakness would lead to a recession. Thinking back to January, it was widely taken as "fact" we'd see a recession this year. Yet by the traditional definition (two consecutive quarters of negative GDP), a recession seems unlikely this year.

Of course, it's possible a recession could happen this year, next year, or the year after next. But saying something might happen isn't terribly instructive and can get investors into a lot of trouble. There is a propensity to worry; fear is perhaps the most potent human emotion. The media's well aware of this. Fear is how papers are sold.

Anyway, editors know publishing stories about what might happen can't lose. If it comes to pass, you're a genius. If it doesn't, well you just move on without much consequence. Of course, financial markets—like hurricanes—are very difficult to predict. It's only natural for folks to seek out all the help they can get. Which is fine, so long as they know what they're getting. It shouldn't be too much to ask for opinion in the opinion section, and news in the news section. "Is" is news; "could" is conjecture. But unfortunately, it's up to us to make the distinction. Investors should be wary.