Friday, January 20, 2012

Why I Don't Read the Financial Press Much

Pity low-level financial journalists.

The big names get to write important opinion pieces on the financial crisis and the banking system.

The low-level guys, on the other hand, every day they have to write garbage about financial markets. Prices went down today? Hmm, what could explain that? How about 'fears of a weakening economy'? Sure, that sounds plausible. Prices went up today? Investors were bargain hunting after yesterday's price decline. Etc.

Realistically, they should just be reporting 'today, the coin landed on heads!', because at a daily level, stock returns are pretty damn random. Over long horizons there's more predictability, but on a daily basis, it's just noise.

Making up this kind of junk tends to erode the intellect (and the spirit). And sometimes this spills over into further sloppy thinking.

The Greek passed on this gem from CNN Money:
At $400 billion, Apple is worth more than Greece
Apple's market cap is higher than the gross domestic product of Greece, Austria, Argentina, or South Africa.

So it's clear this guy doesn't understand the difference between a stock and a flow. Market Cap is a stock measure - not in terms of the 'stock' market, but meaning that it captures the total amount of something. GDP is a flow measure - it represents an amount that occurs each period.

In other words, GDP is analogous to your income for this year and market cap is analogous to your total net wealth. (It's an imprecise analogy, because net wealth represents income you've already earned, whereas market cap represents the estimate of the money you'll earn in the future).

But the point is that comparing these two numbers and saying that 'Apple is worth more than Greece' is absurd. It's like saying that the guy who works in a factory and owns a $600,000 house is richer than the guy who worked at an investment bank, because the investment banker's income this year was only $500,000. The comparison is meaningless.

Not only that, but the whole thing is a non-story.What even happened to justify writing this junk? Apple's market cap increased slightly? Quick, better write a puff piece of meaningless comparisons, because the rubes just love reading stories about Apple!

Remember kids - these are the people telling you why the market moved yesterday.

Pass the salt, please.

No comments:

Post a Comment