Here's some information about investing that you don't see a lot of information on, but which may impact the value of stocks more than insider purchases, company buybacks, and a host of other "this is when you should buy/sell stocks" strategies. An article by SmartMoney called The CNBC Effect summarizes it as follows:
When it comes to investing, it's the metaphors tossed out by financial journalists that might be making the biggest impact on your portfolio.
Here are the details:
According to Michael Morris, a professor at Columbia's Graduate School of Business, certain words used by the financial media to describe daily stock-market movements can subtly influence the way investors interpret the news. His research found that "agent" metaphors — verbs like leapt or climbed that imply purposeful actions — convey an expectation to the audience that today's trends will persist tomorrow. The opposite tends to be true when journalists employ "object" metaphors — words that don't imply the market is moving by its own volition, such as rolled or dropped — or no metaphors at all.
A phrase like "The Nasdaq vaulted higher..." makes a bigger impression than "The Nasdaq fell..." While Morris doesn't think journalists make conscious choices to use agent metaphors especially for up markets and object metaphors (or no metaphors at all) for down markets, there's something about the way the human mind works that leads to this behavior — even on the part of ostensibly objective members of the media.
Then the piece goes on with an interview between SmartMoney and Morris. A couple of the best questions and answers are:
SM: What differences did you notice in the news about a positive movement in an index vs. a negative one?
MM: What's particularly interesting is that the choice of language is not random. We tend to use these agentic metaphors to describe an uptrend rather than a downtrend. That might lead people to take uptrends more seriously, and think downtrends wouldn't continue. Certainly, some days downtrends are being described in agentic language, like the Nasdaq dove, or the Nasdaq searched for a bottom. It's just not as frequent. For the naive investor who's trying to make sense of the newspaper, the mental concepts that get triggered by agentic descriptions of uptrends may lead them to think that an uptrend is a meaningful signal for tomorrow, while the downtrend isn't a meaningful signal about tomorrow.
SM: How can you extend the implications of this research to investors and their stock-market activities?
MM: Some people have noticed that when the stock market became so overvalued in the late '90s, that was the time two things were happening. One was that more investors were making their own decisions as opposed to using a financial adviser. And the other was that the stock-market commentary sector, which previously was in a small section of the newspaper and a small part of the news, grew. Now you had 24/7 news like CNBC. The greater influence of the media at that time had something to do with the market becoming overvalued. One reason might be this phenomenon — the tendency to interpret uptrends as meaningful as regards to future uptrends.
Interesting indeed. It certainly goes to reason that the media influences the prices of stocks simply by covering them in a positive or negative fashion -- regardless of the language used. Does anyone make a strategy of tracking media reports, then buying on positive news and selling on negative news? Would it even work? It's too speculative for me (plus too time-consuming) but it is an interesting concept to consider.
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