James Montier, the author of "The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy," had a bone to pick with television programs that purport to offer investment advice. He began chapter seven with this screed:
“On any given day I can turn on the TV and find at least three channels dedicated to filling my mind with in-depth analysis of what are near random fluctuations in the markets. As I mentioned earlier, these channels are described by a friend as bubblevision. The minutiae of the daily moves are explained to the rest of us by a combination of attractive women and impassioned men, with a smattering of bow-tie-wearing experts to aid credibility.”
Montier added that the financial press does the same, filling “column after column” with after-the-fact explanations for what the market did the previous day. As discussed in earlier chapters, a surplus of information may make us feel more confident but does little to improve our accuracy. And, Montier wanted to bring an associated process to our attention.
“Placebic information”
Placebic information is roughly the equivalent of a placebic medication, or a “placebo” pill. Montier used it in the sense of giving us reassurances that mean nothing. Montier asked, “Could such redundant information really impact anyone’s behavior?” Well, yes it could.
In a classic psychological research study, people standing in line to use a photocopier were approached by queue-jumping colleagues. The queue jumpers gave (1) no reason for wanting to butt in, (2) a placebic response, “because I have to make copies” (as did everyone else in line, of course) and (3) “because I am in a rush” (a reason).
In response to the first inquiry, no reason, the waiting colleagues allowed the jumper to skip the queue in 60% of cases. They were even more accommodating, at 90%, when the jumper used a placebic or feasible reason. Montier explained:
“By simply using the word 'because' in a sentence, someone was able to persuade people to believe that the justification was true and meaningful. We appear to like reasons, however banal they may be.”
He went on to say that people unquestioningly process information in a familiar format.Ă‚
“Hence, the survival of what can only be described as noise peddlers in financial markets. Investors faced with chronic uncertainty will turn to any vaguely plausible explanation and cling to it.”
Futility
To illustrate the futility of much of the media noise about financial markets, Montier turned to a 1989 study by Cutler, Poterba and Summers. They scrutinized the largest 50 moves in the U.S. market between 1947 and 1987, and examined press reports to look for reasons the market moved.
In more than half of those moves, they did not find “any convincing accounts of why future profits or discounts might have changed”. From another perspective, more than half of the moves had nothing to do with fundamentals.
Enter Mr. Market
At this point, Montier introduced Benjamin Graham’s character Mr. Market. Every day, Mr. Market tells you what your holdings are worth and offers to buy you out or to sell you even more stocks. Put another way, Mr. Market is advising you with only the market price and no fundamentals at all. If you take him up on his advice, said Montier, you are dooming yourself to failure.
He then moved on to John Maynard Keynes, who said:
“It is largely the fluctuations which throw up bargains and the uncertainty due to the fluctuations which prevents other people from taking advantage of them.”
These fluctuations, or this volatility, generate the rationale for listening to bubblevision. Commentators, and their explanations, would not be needed if the market did not change so often and by so much.
Conclusion
In chapter seven of "The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy," Montier took on the television (and print) experts who freely dispense advice about investing.
He made the important point that what these experts do is try to explain random fluctuations in the market, even when there may be no meaningful explanation.
With that, he introduced the idea of placebic information, information that is essentially meaningless but provides reassurance. In the investing arena, it means information that ostensibly reassures investors there is an escape for the uncertain.
To demonstrate the largely meaningless nature of television and press noise, he cited a study that found no "convincing" reasons for many major market moves over four previous decades.
About Montier
The author is a member of the asset-allocation team at GMO, the firm founded by Jeremy Grantham (Trades, Portfolio) in 1977. According to his Amazon profile, he was previously co-head of global strategy at Société Générale (XPAR:GLE, Financial). The author of three books, he is also a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. The book we are discussing was published in 2010.
(This article is one in a series of chapter-by-chapter reviews. To read more, and reviews of other important investing books, go to this page.)
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.
