The Role of Financial Blogs: An "Outside" Perspective

How can investors use financial blogs to inform their decisions?  At "A Dash" we seek to explore this question since we have a blog about a book -- one that is aimed at the intelligent individual investor.

Background

We hope to describe some important roles for financial blogs.  We expect to provide some criteria by which investors can reach their own conclusions.  A good starting point is to consider both the positives and negatives from the rapid growth in financial blogging.

One might well question what could possibly be negative about providing more information.  That is our own predisposition, probably shared by the rapidly expanding community of bloggers and readers.

Our reason for raising the question in this way is simple and twofold:

1. Despite the growth, most investors do not use this resource.
2. There are many traps and pitfalls for blog readers.

The very elements that provide the strength from blogging also introduce problems.

An "Outside" View

Today's Investment News described a survey reported in Spectrem Group’s monthly High Net Worth Advisor Insights newsletter.  While a subscription is required for the newsletter, some of the important findings are highlighted in the article, "Credibility of financial blogs is questionable".

The survey found that (only) 14% of 758 wealthy respondents "admitted to reading" at least one financial blog.  The "blogs" cited most frequently were actually from rather mainstream sources like the Wall Street Journal, Yahoo! Financial, The Motley Fool, and MSN Money.

“There seems to be a disconnect as to what is a blog and what is a legitimate article,” said Eduardo Eusebio, editor of the High Net Worth Advisor Insights. “Maybe the media is encouraging blogs, because the line between a financial blog and a financial news story is becoming more blurred.”

The quality of the information  is questioned.

Robert Ellis, a New York-based senior analyst at Boston-based Celent LLC, noted that the top five blogs in the survey are all from credible sources, but he added that there are many shady options in the wealth management “blogosphere,” which is 1 million websites strong.

According to Mr. Ellis, blogs can be broken down by those that use credible sources from professional journalists and others run by non-professional sources and non-journalists.

“When a blog is written by a respected journalist who is an expert on the topic that they are writing about, I see that as somewhat beneficial,” he said. “With a blog, you can get additional feedback, and I see that more as enhanced journalism than financial advice.”

However, blogs run by non-journalists are “just dangerous,” Mr. Ellis said. “You don’t know about the credibility of the author, and you don’t know the credentials of the respondents on the blog.”

Considering these Conclusions

A main theme is that blogs by journalists are more dependable than blogs by non-journalists.  This is certainly worthy of some debate.  Our own impression is that articles published in mainstream publications are subject to fact-checking and editorial discretion.  Blogs from the same publications are much more free-wheeling and controversial.  Journalists are not always objective experts.

The policing of facts and interpretation in blogs comes from other blogs that raise questions and provide challenges.  This process is effective only when the "gatekeepers" of the financial blogs, those who highlight articles and point readers to those of relevance are willing to accept that role.  If the gatekeepers who highlight articles are reluctant to cite contentious refutation, then the process breaks down.

What Blogs Do Well

There are some clear-cut advantages to the growth in financial blogs:

• Discovering little-known facts.  The work of many thousands in seeking information makes it available to more people -- much better than it could be done in mainstream media (MSM).
• Diversity of opinion.  Viewpoints that lack general acceptance gain visibility and consideration.
• Speed of dissemination.  Breaking news quickly finds its way around the blogosphere.  Posting is swift and so are the citations.

Where Blogs May Introduce Danger

• The wide array of facts may create a "he said, she said" environment where the reader has no basis for checking validity.
• Diversity of opinion has a leveling effect.  Many readers may find it difficult to discriminate between those with strong presentation skills, but faulty analysis, and those with a better analytic method.
• Speed kills.  When information moves quickly, everyone is trying to break a story.  Even MSM may be pushed into reporting before facts are checked.

Conclusion

Financial blogs represent a new source of information for investors, still underutilized by most.  Making the most of these resources depends on both the evolution of the blogs themselves and the ability of investors to spot strengths and weaknesses.

Our thinking on this is a work in progress, so we hope to generate some discussion and comments.

Comments

[Ed]

I have been a journalist since 1965. I spent most of my time at large daily newspapers, as a writer and editor. I now write about consumer electronics.

I was shocked by this sentence: "When a blog is written by a respected journalist who is an expert on the topic that they are writing about, I see that as somewhat beneficial.” Precious few journalists are "experts" on their topics. They talk to experts to develop their stories. I have known hundreds of journalists. I wouldn't take investment advice from any of them.

Let me give you an example. Perhaps the best-known financial journalist today is Jim Jubak. I read him; Mr. Jubak is interesting. But the abbreviated biography provided by MSN does not indicate a successful background in investing. Rather, he appears to have spent his life as an ink-stained wretch.

According to MSN, Mr. Jubak's stock recommends go back to 1997. That encompasses the Internet mania, bust and subsequent bull market. MSN shows his "main portfolio" as appreciating at 14.54 percent annually since 1997. http://articles.moneycentral.msn.com/Commentary/Experts/Jubak/Jim_Jubak.aspx?msn=1 MSN says the "S&P" has appreciated at 5.86 percent. I assume that is the S&P 500. I further assume these numbers are correct; I didn’t check them.

Delving further into Mr. Jubak's numbers is illustrative. MSN shows his picks for Jubak's Future Fantastic 50 from the Internet mania era. http://money.msn.com/investor/MSNStockPicks/pickerDetail.asp?PickerID=9BFA4D19-E57A-488E-B749-B03D5DDCCB1C
They go back to 1999. I could find nothing that went back to 1997. Perhaps I missed it. Anyway, here are his picks from 1999-2000 and their results. They are taken from MSN:

TSM -4.35%
SLR -90.54%
QLGC -35.30%
WIND -28.68%
RFMD -67.30%
MDT 49.27%
LVLT -91.04%
PMCS -80.50%
QCOM 85.77%
VRSN -81.23%

I make that an average return of -34.39%. Mr. Jubak went right over the cliff, just like the rest of us idiots.

Since 2003, Mr. Jubak has done much better. Of course, we've been in a bull market since 2003. Does this reflect Mr. Jubak's skill? Better sourcing? A rising tide lifting all boats? I vote for better sourcing, although the latter certainly has played a role. Mr. Jubak may even have some skill.

I don't mean to pick on Mr. Jubak. He's a talented guy; if nothing else, he is interesting. Besides, his record, or most of it, is published. Allow me to give you a second example: Alan Abelson.

Here's a guy who never met a bull market he didn't hate. To him, the glass is never half empty. It is completely empty, always, no matter what. Mr. Abelson's sources apparently get up on the wrong side of the cave, every day. Does that make him an expert? Gosh, of course!

You could go broke following Mr. Abelson. Of course, that would be the least of your concerns. You'd be strapped down in a lunatic asylum, a babbling depressive.

Traditional journalism is being killed by the Internet. Ten years ago, newspapers were unassailably rich and powerful. (I'm not going to address television. It is mostly a news wasteland. Have you watched CNBC lately?) Today, newspapers are looking desperately for a business model that works.

Why? People are less and less interested in reading "expert" journalists. Even straight news stories are filtered through journalists' biases. And they have plenty of them. For instance, they are nearly all Democrats; newsroom Republicans could caucus in a broom closet. Practically all journalists are pro-choice. They stand four-square for the rights of gays; anyone who questions a gay-rights proposal, no matter how ludicrous, will get short shrift. And they are poorly educated in business and economics. Most know virtually nothing about accounting.

Information in professionals' blogs is much better. It is unfiltered. Obviously, professionals have biases, too. But regular readers will figure them out quickly. And, of course, you'll get some "he said, she said." That's typical of life, isn't it? I say, give people all the information they want. Let them make up their minds. Most people can think on their feet.

The Internet is a highly destructive force. News organizations once had a death grip on information. Today, they are little more than superfluous. I have subscribed to the Wall Street Journal since 1975. But I don't plan to renew. Who needs it? Professionals' blogs are much better!

I see that I have run on and on. I apologize. Let me just make a few more quick points:

A. The people quoted in this posting may be confusing columns and blogs. In the former, the journalist speaks his mind. But what he says is subject to editing. He may have to be careful of advertisers. The final product may or may not reflect his views 100 percent. Blogs presumably are unedited. The journalist's prejudices and beliefs will be clear, especially over time. If the blog is on the newspaper's site, he may still have to tiptoe around advertisers. (I'm using he/his for the sake of convenience. Many (perhaps most) journalists are women.)

B. Daily newspaper stories are not typically subject to fact checking. There isn't time. Reporters work hard—really hard—to be accurate. And editors are quick to question odd things. Inaccurate reporters are ostracized in the newsroom, and soon fired.

C. Accuracy has always been absolute gospel in newspapers. But today, reporters are often required to get stuff up on the Internet immediately. Newspapers feel they must do that to attract and hold readers. Reporters I know are terribly unhappy about this situation. They don't have time to call all their sources. It is an invitation to inaccuracy. Be skeptical of what you see early in the day.

Lastly, let me say that I find A Dash of Insight terrifically informative. The emphasis on good sourcing is impressive and refreshing. The writing is always clear. A Dash of Insight is an excellent example of the Internet's advantages. This information would be difficult to find otherwise.

[Zach]

Hi all,

As a student slowly entering the financial world, I love blogs for the comment section present after each article. It generally provides a depth and depth of content beyond the original article, and in a comprehensible way. They also tend to have a tremendous amount of back and forth, which is always a good thing to deserve when trying to develop critical analysis skills.

[oldprof]

Tim --

I hear you! It is like we do not even exist!

But it is nice to know that some are reading and getting some benefit. Thanks for alerting us all to your site, which I have added to my RSS reader :)

Lots of interesting stuff there.

Jeff

[Eric]

"However, blogs run by non-journalists are “just dangerous,” Mr. Ellis said. “You don’t know about the credibility of the author, and you don’t know the credentials of the respondents on the blog.”

The important point of the growth of blogs is the ease in which information is spread. There are essentially no barriers to entry in publishing anymore. Who cares about credentials? Do you think President Johnson would have gotten away with the Gulf of Tonkin incident if it happened today? No, because half the ship would have blogged that there wasn't any attack that night.

Journalists are more reliable than non-journalists? Rupert Murdoch is never going to tell me what to write.

[Tim]

As an individual financial blogger I resemble that remark. I find plenty of errors or misinformation in the mainstream financial news. I think the financial mass media puts out information that leads the mass public in the wrong direction. The herd mentality works on both sides. Thus ends the metaphor attack.

[oldprof]

I agree with Larry that the "blogs" of these major sites are more like extensions of the financial website. That is part of the point I was trying to make about the lack of impact of financial blogging -- so far, at least.

Thanks for the comments.

Jeff

[Larry Nusbaum]

"The Wall Street Journal’s blogs topped the list, with 13 users.Rounding out the list were blogs produced by Yahoo! Financial of Sunnyvale, Calif., The Motley Fool of Alexandria, Va., Boston-based Fidelity Investments and Redmond, Wash.-based Microsoft Corp.’s MSN Money. They had, 10, nine, eight and seven users, respectively."

These are blogs or financial websites? I say the latter.

[Aaron]

I think the diversity of opinion point and the leveling effect of it definitely hurts blogs. Readers have a difficult time trying to figure out which person they should trust. I think it will be interesting to see if in the future blogs will be trusted more or less than they are today.