Cramer Controversy and the Perils of Stock Picking (TSCM)

Roger Nusbaum submits: In the last few days there has been a lot of controversy whipped up surrounding Jim Cramer and his comments about United Healthcare (UNH). You can read a summary at Jim Cramer Alerts if you are interested. I don't want to turn this into a bashing session but instead focus on what can be learned from this episode.

When investors try to navigate the market and grow their portfolios by making a lot of short term trades in anticipation of certain events they are choosing a path that is more difficult and takes on more risk. Some folks can tolerate this and some can not.

Let's say that in a given year you can buy an S&P 500 index fund, make no other trades and get 10%. Let's also say that in the same year another investor can make 75 trades gaming various events and net out a return of 13%. Is all of the extra work and increased risk taken worth another 3% in returns? For some people yes and for some no.

This is the issue, how much value are you really adding? What would your answer to that question be if after beating by 3% this year you lag by 4% next year?

I am a firm believer in letting the market do its thing and I try, as best as I can, to not get in the way. Occasionally changes need to be made and it is human nature to take a flier now and then, but I question how many people who are just trying to retire a couple of years early really need to game an earnings report?

Comments

[User 1:]

A great post on stock picking, Roger, and an important one for the Seeking Alpha community.

My personal experience is that a very smart person who spends alot of time understanding 1) market forces and 2) particular stocks/sectors can outperform on a reasonably consistent basis, if they are prepared to go short and give due attention to asset allocation. Emphasis on 'alot of time'.

But this is not the typical investor, and there certainly are risks involved that for most people don't justify the approach vs. just buying a index fund.

2006 Jun 05 02:12 PM

[User 1:]

The web site you point to is remarkable -- is he basically reproducing/summarisin... all the content from the subscription-only section of Real Money?

2006 Jun 05 03:10 PM