It's a way to keep in touch with friends, stay on top of the latest trends, and even keep up to date on important news. Having access to so much information in one place should be an ideal opportunity to broaden our horizons.
But you probably already know where I'm going with this...
Unfortunately, social media rarely challenges our viewpoints. Instead, algorithms look at what content we're drawn to... and feed that same type of content back to us.
These algorithms are designed to keep us engaged. We grow accustomed to having new information at all times. And that keeps us coming back more often and for longer.
You might have heard the term "echo chamber" used to describe social media. It means our feeds show us the same ideas repeated, day in and day out.
Research paper after research paper shows the risks of the social media echo chamber. In particular, it's emotionally distressing and reinforces our existing biases. You're far less likely to consider opposing views when you aren't exposed to them in the first place.
The social media echo chamber has been a hot-button topic for years. Facebook and Twitter in particular have come under fire for their roles in recent presidential elections. But the concept of echo chambers existed long before these social media giants were launched... and will doubtless outlive them (and their successors).
Traditional media suffers from the same issue, since it's also vying for eyeballs. And as I'll explain today, if you aren't careful, the echo chamber can also hurt your investments – whether you're watching the financial news or scrolling through your social media feed.
Talking heads like CNBC's Jim Cramer offer 10-plus buy and sell recommendations daily. Every lunch hour, people talk about his "trades of the day."
After the U.S. markets close, there's a wave of breaking earnings announcements. Later in the evening, there are news bulletins that the Japanese stock market will be opening soon.
Most of this news isn't pressing... or even all that valuable. But to realize this, you have to step back and think critically. And that's hard to do with much of the financial media. It's designed to keep you watching, to get you to churn through your investment account, and of course, for entertainment purposes.
These trade recommendations flip-flop from day to day. Many of these pundits don't have great track records. You may recall Cramer fighting back tears while apologizing for his recommendation of Facebook owner Meta Platforms (META) last year.
And it's tough to break that cycle... Because when we've always done something one way, we often don't think about what we can do to optimize the process.
That's how folks end up paying $14 per month for a Netflix (NFLX) account they've had for five years and haven't used in four years and 11 months.
It's why folks deposit all of their paychecks into the same checking account they've used for decades... when it would be better to move their money into a savings account.
And it's why so many people struggle to invest every month.
The financial-media echo chamber is designed to make eager viewers think they need to trade constantly. It's forcing folks to tread water with their wealth.
Echo chambers are the reason most folks still talk about useless as-reported accounting metrics. Every day, those news anchors are reporting company earnings based on generally accepted accounting principles ("GAAP").
This repetition makes us believe those metrics are the most accurate. But there's a reason we focus on Uniform Accounting metrics at Altimetry – they line up far better with long-term stock performance.
From 1998 to 2020, the top 30 companies in the S&P 500 on an as-reported basis returned 8.8% per year. That was better than the broad index's 6.5% return. But the top 30 companies on a Uniform basis did far better... returning 13.9% per year.
CNBC doesn't have your best investment outcomes at heart. Neither do other networks. They provide plenty of good data, and sometimes they have valuable insights.
But if you trade every idea recommended every day, you'd likely do much worse than if you'd put that money into the S&P 500 and forgot about it.
Long-term investing is how you create the most wealth. It's not by churning your entire portfolio every day.
With so many voices telling you how to trade, it can be easy to feel like you're stuck treading water... Here are a few reminders.
From a budgeting perspective, it's a great idea to do an annual review of your expenses... especially recurring expenses like subscriptions. It's easy to forget what and how much you're spending every month without realizing it.
Remember that one of the worst investment decisions you can make is to not invest at all. If you have money coming into your checking account every few weeks, find a way to invest at least a bit of that, either in the market as a whole or in specific stocks.
And when picking stocks, tune out the echo chamber. Do your own research. Don't trade based on media content that exists to tell you what you want to hear.
March 10, 2023