Why investors need a diverse media diet

“a great many people think they are thinking when they are merely rearranging their prejudices.” – William James

According to investor and author Michael Mauboussin, three conditions must be in place to tap into the wisdom of crowds: diversity, aggregation and incentives. A diverse group of people reduces the collective error since over and under estimations should cancel each other out. Aggregation ensures that everyone’s information is accounted for. Finally, incentives encourage people to participate only when they think they have an insight that provides a valuable addition to the collective knowledge base.

Unchecked devotion to the wisdom of the crowds is folly however! When one or more of the three conditions of the wisdom of crowds are violated you should watch out. And the most important one to watch out for is diversity, which unfortunately is also the most likely condition to fail.

Since humans are naturally social animals we sometimes have a habit of following what our peers are doing, making decisions based on the actions of others, rather than based on our own private information and insights. These so-called ‘information cascades’ explain booms and crashes in financial markets and why fashions and political extremes come and go. As Charles Mackay tells in the book Extraordinary Popular Delusions and the Madness of Crowds:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

A diverse media diet can highlight those risks and opportunities that others are not seeing, or perhaps don’t have the right incentives to shine a light on. The media may want to ensure access to their well cultivated and powerful sources, and so fail to puncture an unsustainable narrative. Equally, a diverse media consumption can be a source of ‘signals’, highlighting emerging trends in far flung markets before other media sources. This gives the smart investor a potential advantage over the competition.

Diversity of thought can’t be tied down to specific categories. Our age, our wealth and income, the circle of friends that we keep, and of course our upbringing and family background all affect how we think. However, our biases tend to be on show when its clear where our differences lie – gender, race and our political point of view.

Gender bias

Research has found that men enjoy an out-sized influence in both conventional and social media. According to the Women’s Media Centre men receive a disproportionate share of by-lines and TV credits. In a survey of 28 American news outlets in late 2017 that analysed over 52,000 pieces of content, researchers found that almost two-thirds of by-lines in American reporting credit men.

These gaps are even larger for coverage of subjects that are traditionally of greater interest to men. Women were least likely to report on sports, registering a mere 10% of by-lines in print media and 21% online. In contrast, they made up a majority of reports about lifestyle and health. The gap was also noticeable in fields that are especially relevant to our future. When it came to issues like finance, business and politics women accounted for between 34% and 40% of by-lines.

The size of the gender gap varies widely by publication. At USA Today, just 31% of by-lines credited women. Conversely, a few online outlets, including The Huffington Post and Vox, managed to achieve gender parity.

The type of media broadcast also shows significant divergences in diversity. Online publications are typically more balanced (46% women) than print (38% women). Meanwhile, evening news broadcasts are the least balanced, with men reporting three times as much as women.

Male journalists also enjoy out-sized influence on social media. A study published in the International Journal of Press/Politics found that male journalists have twice as many Twitter followers as their female colleagues do. They are also slightly more likely to be verified, an accreditation the site grants to prominent users. Male political reporters form an echo chamber, amplifying the voices of male co-workers three times as often through retweets as they do for female colleagues.

Men tend to dominate comment boards across the Internet too. Dr Fiona Martin of Sydney University analysed comments from 15 major websites and totted up the gender of the top 100 commenter’s. On international sites men accounted for as much as 79%. Women were slightly more likely to comment on local news sites, but men still dominated the conversation.

Racial bias

Two New York Times journalists, Rachel L. Swarns and Darcy Eveleigh aimed to uncover the historical erasure of African Americans from news organisations by examining unpublished photos in their own papers archives. It wasn’t long before they confronted racial bias in photo editing. One example was photographs that ran in the New York Times following a tennis match in the early 1960s in which Arthur Ashe defeated Dennis Ralston:

“This is a story that we pretty much found was a blatant example of racism and bias by editors at the time,” Eveleigh said. “Arthur [Ashe] was the No. 6 player at the time, and he upended the No. 1 seed. But the next day, the paper ran two photographs of the white loser and not a single photograph of the black winner.”

This was an obvious example of racism. It also gave the media consumer a completely false perception of the reality that unfolded on the tennis court that day.

Despite the passing of time racial bias may still exist in the media, it just isn’t as obvious. It’s worth reflecting that when compared with the make-up of the population there is an under-representation of minorities in the US media. In 2017, only 16.6% of journalists at American daily newspapers were non-white. This compared with more than 37% of people in the US population. Meanwhile, according to a 2015 poll, more than three-quarters of the guests on Sunday morning TV shows were white.

Racial diversity is important so that the media can accurately reflect the events occurring across very different communities, but perhaps even more importantly portray people’s underlying hopes and fears. In the absence of the context behind why individuals or groups act a certain way we are liable to only judge it based on our own values and experience of life. This of course may be a very blinkered view of the world.

Political & ideological bias

When compared with bias due to gender or race, one might argue that there is nothing harmful with bias based on someone’s political affiliation. Nevertheless, an environment where political parties command unswerving support from their own base and unswerving loathing from the opposition is not one conducive to rational reporting or discussion. Indeed, in his book How Change Happens author Cass Sunstein argues convincingly that many of us now dismiss entire groups of people on the basis of their political affiliation – something he calls ‘partyism’.

The impact of political bias was highlighted by research carried out by The Knight Foundation and Gallup in 2017 in which they created an experimental news platform (the same study mentioned in Chapter 11). Recall that the researchers discovered that a reader’s trustworthy rating of a news article is the sum of: an article’s inherent qualities, the reader’s personal views and brand prejudice.

But the research also unearthed some insights into who is most likely to suffer from bias. Those people with the most extreme political views, and were least trusting of the media were found to be the most biased. The content of the news also affects the degree of bias – political stories generate significantly more bias than those about economics or science.

Politics transcends national borders of course. The media in different parts of the world offer very different perspectives on how a story or event has unfolded. They too will have their political bias, but it may be very different from the left versus right bias that you see in your own country.

Consider the reaction from the media following the uprisings in Tunisia, Egypt and other countries across Africa and the Middle East. The media coined it the ‘Arab Spring’, but that was a misnomer. For while the liberal media rushed to interview those protesting in the city streets with bold signs, they mistook them for the voice of the people.

Another example comes from the reaction of the American led deal to curtail Iran’s nuclear ambitions. While the Western media concentrated on the positive Israeli reaction, they ignored the Arab world’s displeasure that the deal didn’t go anywhere near far enough.

Diversity of thinking can also be reflected in the media’s attitudes to different financial markets. This could take the form of being unfairly critical of the benefits of ESG investing; failing to see the fail the benefits of hedging against a decline in dollar hegemony (gold and bitcoin are dismissed as worthless) or being too focused on domestic markets (investors get a narrow picture of the available landscape of investments).

Whatever the subject, if its prone to political and ideological bias its important to consume a diverse diet of media views.

Bias may not be obvious

In his book The Tipping Point, author Malcolm Gladwell recounts an experiment by researchers from Syracuse University. During the 1984 US Presidential campaign they videotaped the male news anchors from the three nightly news networks – Peter Jennings from ABC, Tom Brokaw of NBC and Dan Rather from CBS. Excerpts were shown (with the sound turned off) to a group of randomly chosen people who were asked to score the emotional content of the expressions of the three men.

Tom Brokaw’s and Dan Rather’s expressions were equally neutral when talking about either Democrat or Republican candidates. In contrast Peter Jennings’ expression lit up when he talked about the Republican candidate. Just looking at pure story selection alone ABC (Jennings’ employer) was shown to be the network most hostile to the Republican’s.

How much of an influence did the subtle pro-Republican bias in Jennings face have? Well, the researchers found that those voters who watched ABC voted Republican that year in far greater numbers than those who watched CBS or NBC. In 1984 Republican nominee George Bush went on to win the election. Four years later Bush was up against Democrat candidate Michael Dukakis. The experiment was repeated, with the exact same results.

Finally, it’s worth noting that just because media organisations (or any group of people for that matter) appear to be diverse and unbiased doesn’t mean that they necessarily are. Consider a situation where a media company has 50% male and 50% female journalists and that 30% of the total are of non-white ethnicity (broadly representative of the population of the United States). If all of the male journalists were born in New York, went to the same Ivy League school and learnt the tricks of the journalism trade at the same university then it’s unlikely that they will exhibit particularly diverse thought.

How to have a more diverse media diet

– Recognise that all media sources are biased: Despite what they might say, all sources of media are biased in some way or another – political, financial, social, etc. Each news source is an amalgamation of people of varying kinds; the best you can hope for is a mix that balances itself out.

Deliberately consume media with opposing biases: You might not agree with anything that the source says but at least you have a much richer picture of the issues on both sides of an argument. In the UK this could mean reading both The Telegraph and The Guardian newspapers. When it comes to international issues consume media from other parts of the world too. It may offer a completely different perspective on the story.

– Seek diversity: Get opinions from people that know a little about a lot of things. These types of people are not married to a single explanation for complex problems, and can spot and incorporate learnings from other unrelated subjects. Follow more female journalists on Twitter and other social media platforms. Follow and engage with a wider range of people from different backgrounds.

– Be a bridge between tribes: Information often fails to penetrate into a particular social group if its members are too closed off and show little diversity. By acting as a bridge between these groups and others, and with the outside world you can help correct the spread of misinformation.

– Find the best aggregation of diversity: If in doubt seek the views of a media outlet or outlets that do the best job in aggregating the views of a diverse group. Avoid the evening news broadcast and look for your news from one of the more gender / racially balanced media outlets.

– Recognise that bias is communicated in a variety of different ways: Around 93% of communication is estimated to be non-verbal (55% body language and 38% tone of voice), leaving just 7% to the actual words spoken. The exact percentages are irrelevant. Even if only half of how we communicate is non-verbal, it’s clear that bias could be communicated in a way that would not be picked up by analysing the content of a story or message. The ability to spot non-verbal bias will become ever more important as the content we view online migrates towards video.

– Explain how something works: Try sketching out, in detail the relative merits of a particular issue. Once you start doing so you will soon come to the realisation that you know far less than your strident views suggest. Explaining what you know, and don’t know can have a humbling effect.

As billionaire investor Charlie Munger artfully highlights, it is important to be able to understand someone else’s perspective before getting into an argument: “I never allow myself to hold an opinion on anything that I don’t know the other side’s argument better than they do”.

Sell In May And Go Away 2020

“Sell in May and Go Away” is an investment advising investors to sell their investments in May, wait out the summer months by the beach before reinvesting in November.

In theory the existence of such a seasonal pattern should be quickly eroded as investors try and front run selling by other investors. In turn reducing the prevalence of the evidence to support the adage. Analysis by Rothko Research looking at major equity indices over a period of several decades finds mixed results.

That being said there is plenty of convincing evidence and arguments to suggest that 2020 could be one of those years where the adage holds true. Here I outline three reasons why this could be the case:

Follow the money

There is a strong historical relationship between money supply (as measured by M2) and annual changes in the S&P 500. As money supply grows (the result of easing by the Federal Reserve and increased demand for credit), risky assets tend to be bid up as too much money chases too few assets. But importantly it operates with a lag. Based on analysis by Nordea there is a lag of 252 trading days between a change in M2 and the impact of that liquidity on the S&P 500.

Right now (this week) the S&P 500 is likely to see liquidity dry up and go into reverse – perhaps moving lower by 25%-30%. Only later in 2020 or early 2021 is it likely to bottom. Historical trends suggest that the wall of liquidity unleashed by the Federal Reserve’s easing policies due to covid-19 will flood the US equity market making 2021 a potentially strong year for asset prices.

China and the US escalate their battle of words and deeds

Authority figures and PR executives have long known the value of deflecting attention. Directing the public’s anger to someone else, preferably someone or some country a long way overseas is the idea strategy to divert gaze from any embarrassing shortcomings.

What better idea then (ahead of the November Presidential election) to deflect attention from any domestic leadership shortcomings related to covid-19 than blaming someone else, especially the country where the virus is understood to have originated from, China.

According to US political commentator Karl Rove, “If the issue is who is tougher on China, this is going to be a Trump victory.”

The two countries are likely to clash economically and financially. First, over the doomed trade deal and second over the dollar yuan exchange rate. A sharp weakening in the yuan from current levels could set the stage for further economic conflict between the two countries and set off an exodus from risky assets.

Corona Wave 2.0

Many will now be familiar with the scale of the 1918 Spanish Flu, in particular the second more deadly wave of infection that hit during late 2018.

According to the US Centers for Disease Control and Prevention (CDC) the rapid spread of the coronavirus in Latin America (now experiencing their autumn/winter) raises the possibility of a second round later in 2020 just as the northern hemisphere enters winter.

The rebound in equity markets since late March is built, at least in part on investor expectations that the worst is now behind us, cases and deaths have peaked and the economy will gradually reopen.

Governments, companies and people may now be better prepared than they were a few months ago, but that doesn’t mean that a prolonged period of re-shuttering and re-opening of the economy won’t be enormously disruptive.

Related article: Alphabet soup

Retail investors getting spooked

No fee trading platforms such as Robinhood have seen a spike in account applications over the past few months. The combination of boredom, government corona related payments and the abandonment of all sports (and associated betting) has led a flurry of new retail investors into the market.

No doubt sitting pretty at the moment, praising their trading skills and pondering doing it full-time. Beginners luck of course my turn sour when the s*** hits the fan. A change in fortunes could mean that markets quickly give up their gains as sentiment shifts to disappointment.

Related article: The best performing commodity of 2020 is…not gold

The best performing commodity of 2020 is…not gold

As of today (Tuesday 19th May) it’s been a full three months since financial markets went into a spasm as evidence of spread of coronavirus across the globe began to emerge, and the uncertainty over the potential negative health and economic impacts became more acute.

After a tumultuous period it’s worth taking a look back and seeing how far we’ve come. No surprises to see gold prices notching up a healthy 14% increase since the start of the year – the yellow metal has put on a strong performance as economic and political uncertainty has soared and concern that the debasement of fiat was now on steroids.

No prizes for guessing that energy prices – oil, natural gas and fuel – would be down sharply. While US natural gas is down 17% year to date, the benchmark oil futures contracts are down around 50%.

Of course the year to date picture masks massive volatility. Many commodity markets (especially oil and precious metals) sold off sharply during the first couple weeks of March as investors eyed the drop in energy demand and sold off precious metals to meet margin calls elsewhere.

The ideal pandemic hedge has come from a citrus drink that until recently suffered years of declining sales as consumers worried about the impact of teeth decay. Orange juice appears to have regained its status as a natural product to boost their immune systems. Consumers have also resorted to juice as consumers – worried about shortages and being in public places – have stocked up rather than waste real fruit.

Adverse weather in Brazil (one of the major producers) has also supported prices. Despite the rebound in orange juice futures since the start of the year, prices remain 50% below the record high prices achieved in October 2016.

Table: 2020 commodity futures price change – year to date

Related article: Orange juice prices: The top 10 most important drivers