Financial Media Coverage 2

A month ago, I wrote an entry about the failure of my favorite CNBC show to recognize that Apple probably wasn't in for a (short-term) pullback. A month is a reasonable time frame to follow up on people's buy/sell calls, so let's see how things turned out:

I'm sorry, you were saying?

How Much To Teach

As a Ph.D. student at a public university, I am obligated to teach. Many seem to assume this just means TA responsibilities, but I'm actually the instructor of record for a class of 50: I choose the material to be covered, and I alone assign those oh-so-important grades. This semester, as with last spring, I am teaching financial management, the core finance course that must be taken by all business undergrads.

The course is supposed to be an introduction to both investments and corporate finance. I work primarily in empirical asset pricing, so naturally I like to dig deeper on the investments topics. Friday marked the end of the chapters on the most important investments material we will cover, culminating with an explanation of the Capital Asset Pricing Model (CAPM) and sample applications. What we did not cover, however, was a rigorous explanation of where CAPM comes from and how to derive it.

To be fair, no sophomore-level introduction to finance course would cover the derivation of CAPM. (Of course, I am talking about the derivation that follows from William Sharpe's 1964 Journal of Finance paper, "Capital asset prices: A theory of market equilibrium under conditions of risk", not the stochastic discount factor-based derivation taught in finance PhD programs) At my school, the relevant course is the aptly-titled "Investments" (which incidentally I will be teaching next year). So, if students are going to learn how to derive CAPM in investments, what's the big deal? For one, most of my students won't take investments, but there's a larger pedagogical question at hand.

The lecture ended about 20 minutes early; I had finished covering the material that would be on the students' next test. Part of me wishes I had spent that 20 minutes giving the students a crash course in CAPM derivation, but realistically, it just would have been a jumbled mess. Even a rudimentary explanation of Sharpe requires an understanding of the efficient frontiers from Harry Markowitz's 1952 Journal of Finance paper, "Portfolio selection." Alas, students do not (need to?) see efficient frontiers in the core course.

(As a sidenote, both Markowitz and Sharpe are Nobel Laureates, based in part on the work in those papers)

Of course, I could have structured things to leave a full class session for Sharpe and CAPM, but I could not reasonably test them on the material since, as mentioned, it's really the domain of the investments elective, and for those who miss the class, it's certainly not in the textbook. What, then, is the point of losing an entire class session in the name of "education" when the majority of my students aren't even finance majors?

There's a very small chance that some undeclared business students might be moved by the elegance of CAPM and decide to declare as a finance major; there's also a very small chance that I'll win the lottery. Then again, maybe that's not the proper metric of success as a teacher. Trying to inspire all my students may not necessary (or even desirable) if I can inspire just one who goes on to do great things; for everyone else, perhaps it is sufficient that I simply prepare them for their first job out of college.

For what it's worth, yesterday the students took the aforementioned test, and they performed very well on the CAPM section.

Financial Media Coverage

CNBC is an interesting animal. Many praise its coverage of market events and interview exclusives while just as many criticize its sensationalism of market movements and oversimplification of investing. Something I think almost all investors and traders could find useful is Fast Money, a daily digest of market developments and analysis from industry professionals. Despite its name, the show is not some wasteland of stock tips and get-rich-quick schemes, despite what Jon Stewart may believe.

Wednesday's price action in Apple (and the market as a whole) was certainly worth the attention given on Fast Money: everyone agreed that Apple's morning move from $509 to $526 followed by a close at the daily low of $497, all on five times normal volume, signaled an important reversal and intermediate price top, and that while you shouldn't necessarily get short of the stock, long positions should be lightened.

What happened yesterday with Apple, however, received hardly any attention at all. The panelists spent less than one minute discussing what today's gap lower open, followed by stabilization, followed by a close near the daily high meant for the price reversal thesis.

Those unfamiliar with the show might attribute the producers' decision to self-preservation - they don't want to look bad. However, the show has a segment specifically for revisiting bad calls made previously by the panelists called "Fast Fire." And really, did you actually expect coyness from a show entitled "Fast Money"? That the price action caught the producers off-guard isn't an entirely meritless argument, but I'd say the chart below offers strong counter-evidence:

No, there really doesn't seem to be a good reason for what happened on yesterday's show. It bothers me, not just because I'm a fan, not just because I'm an Apple shareholder, but primarily because there are people who watch the show who also control vast sums of investment capital.

We should all think critically about the financial information we consume. We know that investors have home bias for stocks to the detriment of their portfolio returns, and that's partly driven by media consumption vis-a-vis frequency of exposure. Consideration of content presentation will make you not only a more conscientious investor but also a more successful one.