Media often only addressing perception of risk

By DAVID MOON, Moon Capital Management, LLC
June 24, 2012

Comedian Henny Youngman once noted that he read so much about the evils of drinking that he decided to give up reading.

While Youngman's logic might not work at the doctor's office, it does remind us of the risk of letting the media drive your investment mindset. Consider just the past week or so.

A single news source,, apparently couldn't decide whether the situation in Europe was positive or negative for stocks. Here’s their June 14 headline: “Stocks set to slip as investors eye Europe.” Ok. That makes sense. We’re concerned about Europe, so stocks are going to drop. I get it.

Except a few hours later - with the Dow Jones Industrial Average trading up – a new headline appeared. “Stocks edge higher amid Europe uncertainty.” The Dow closed up 156 points that day; the headline was eventually changed to “Stocks soar ahead of key weekend for Europe.”

Huh? Is European uncertainty good or bad for stocks?

By the next morning, June 15, apparently Europe had become a worldwide force for financial good. “Stocks set to rise amid optimism about Europe.”

On the next trading day, June 18, however, the pendulum had swung again. “Stocks set to slide as enthusiasm for Greek election fades.”

As you now expect, the June 19 headline was completely different. “Stocks set to rise amid central bank hopes.”

Did no one at notice these vacillations?

There is a massive difference between risk and the perception of risk. The press is generally only capable of addressing the perception of risk – and only in a superficial fashion. As a result, investors’ emotions are unnecessarily whipsawed between depression, and euphoria, usually with little real underlying logic or rationale.

It is not a new phenomenon.

Long-time financial journalist Dan Dorfman passed away a week ago at the age of 80. He was, for a brief period in his career, Jim Cramer before there was Jim Cramer. He could move markets with his comments, opinions and dissemination of rumors. The Nasdaq even instituted a “Dorfman rule,” allowing suspension of trading in any stock he mentioned on television in an attempt to let the trading volume catch up with whatever impact Dorfman’s pronouncements were having on investor sentiment.

My favorite Dan Dorfman story, however, is from October 1987, in the midst of that generation’s stock market crash. On Friday, October 16, 1987, the Dow Jones Industrial Average declined 4.58 percent – which would be the equivalent of a 585 point decline from today's levels. Dorfman was doing his typical post trading day network interview with Lou Dobbs, passing along tips from the floor of the New York Stock Exchange with his trademark and endearing Elmer Fudd articulation. “Woo, the one thing I am absawootley certain about is that on Monday the market is going up, up, up.”

On that Monday, the Dow dropped 22.6 percent, which would be today's equivalent of 2,900 points in a single day.

Up, up, up. Indeed.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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