In Defense of Jim Cramer

Pity poor Jim Cramer. Despite being the hardest working stock picker on TV (who else do you know this year who's thrown out 3,400 buy recommendations?) and being host to his very own, very successful cable program Mad Money, he seems to get no respect. The latest swipe at his stock picking prowess comes from this week's Baron's which featured him on its cover. The article posits that Jim Cramer's stock picks have performed worse than the S&P 500 over time and that his viewers would do better investing in index funds. It also discusses the back and forth the author had with Jim Cramer himself in trying to reconcile Mr. Cramer's claims of superior stock picking performance and Baron's own analysis of the data.

All of which, in my humble opinion, misses the point of Jim Cramer entirely. First of all, he is now by his own account, no matter what he has done previously in his career, a journalist. And as dictionary.com tells us, journalism is "writing that reflects superficial thought and research, a popular slant, and hurried composition, conceived of as exemplifying topical newspaper or popular magazine writing as distinguished from scholarly writing." I suspect Mr. Cramer does a bit more than "superficial thought" and "hurried composition" (he worked at Goldman Sachs after all) but still and all his raison d'etre is to entertain, educate and inform. To expect superior stock picking from Mr. Cramer is just like expecting Dr. Phil to cure one's serious physiological issues or Jerry Springer to help with one's anger management problems.

Second, who could or would manage a portfolio following Mr. Cramer's advice and stock picks? In the past I have been critical of those who offer "too many" stock picks. If one would ask a traditional (not hedge fund or active trader) professional money manager how many really good stocks he or she could find in one month, I think the answer would be somewhere between one and five. Cramer spouts at least three a day! And much more if you count his recommendations in the "Lighting Round" portion on his show. Is it reasonable to expect that all of these recommendations are excellent? Is it practical to run one's portfolio based solely on Mr. Cramer's recommendations? I don't think so and I suspect Mr. Cramer would agree. I have 17 positions now in my fund and I would be comfortable going down to maybe as few as 10 names. I want my wealth to be concentrated in a handful of names that I have thoroughly researched and feel comfortable owning for the long run.

Lastly, I think the product that Mr. Cramer ultimately sells and he sells it well, in my view, is Certainty. I have spoken with thousands of non-professional investors over the course of my career and the questions I hear the most are "How do you know this stock is good?" or "How can you be certain that the market is going higher?" The art of investing is fraught with uncertainty. Most professionals understand this and own language reflects this uncertainty. Sell-side research reports, by design and regulation, will show the risks to the author's point of view. We all speak of central tendencies, reversions to the mean and likely probabilities.

Not Mr. Cramer. He says "Buy, Buy, Buy" and "Sell, Sell, Sell" and I think he means it. No equivocation from him. I think many investors find comfort in his unblinking confidence. And in those times of stress when many of us may harbor serious uncertainty and may struggle to know what exactly to do, we can find Mr. Cramer pounding the table on a handful of names or begging the Fed to ease with the same pure confidence that fuels each and every one of his shows. Great entertainment? Absolutely. Great investment advice? As good as any other free advice I see. A great way to run one's portfolio? Don't think so.

How should one run a portfolio? Well, there are many successful approaches, but I truly think that looking over the shoulders of VesTopia.com's investment directors is a very good one. I am here because I believe in the company's business model and I think many investors, especially those who want to take a more active role in managing their wealth or those who feel underserved by the traditional providers of investment advice, will find the VesTopia.com model of great value.

Comments

[johnlewing]

Not sure which is more disingenuous, Mr. Cramer's absurd buy/sell recommendations or your promoting your firm under the guise of writing a useful commentary about Cramer.

At least you subtly imply that most investors are better off ignoring active managers like Vestopia.

johnny b. dog

[VladimirSenkov]

Mike,

Cramer can call himself a journalist but i think he is involved in the entertainment industry rather than journalism.
Today he is telling us stories we want to hear about dirty hedge fund industry, about how he used to pump stocks while there, etc, etc. In a few years we might get to hear all the dirt about financial edutaimnent industry. But hey, who am I to question integrity of someone who is so successful, has his own show an attorney and/or governor friends. I certainly don't want the state police spying on me :)

Perhaps more confidence in those who don't know what they are doing is what we need in this market right about now. Other edutainment the likes of "rich dad poor dad" can give someone even more confidence than Cramer. Perhaps enough to quit a job, and buy 8 houses on liar loans.
Perhaps this is a bit of an inside joke, but I'm sure some folks will appreciate.

I think it is a mistake to say that free investment advice is somehow substandard to paid alternatives. I think all one needs to understand about investment is one thing: nobody cares about your money but YOU. If YOU want to invest profitably, YOU have to learn how, YOU have to read books, study history, develop your own strategies and approaches. There are no shortcuts. Nobody else cares for your money. I mean, they do care when it comes to selling something to you, sure, but that's about it. Maybe some more experienced relative of yours or someone you trust like a teacher could give you some help with starting you on this path, but to make any money investing you have to have:
1) good ideas
need to study seriously to get those. can't get those simply by listening to headlines and edutainment. can't think for yourself, can't separate from the herd and see things for what they are.
2) conviction
If ideas were not yours to begin with, you will not have conviction necessary to succeed, no matter how convinced Cramer or whoever else was when he was screaming "BUY" off the TV screen. Nor will you know when to change your position if you didn't know what the idea was based on and depending upon to begin with.

And last but not least. Investment is about quality, not quantity. Nobody cares how many recommendation Cramer gives. That's not working hard, that's working dumb. You have to be working smart and only act where there is a good idea, not just some idea. A few good ideas and a lot of waiting will make you more money than trying to follow 3400 buy recommendations you've heard about on TV.

Mike, so there went my totally free advice. Is it now the best you have seen? :)

[nate.willard]

Great article on nobosh about Cramer &amp; Index Funds: <b>FA on nobosh</b>

[drbenway]

A lot of naive novice investors bought stocks on his advice. They have a short memory or were not around long enough to remember how he touted Global Crossing, AOL, Priceline, and other junk in the good old dot.com days.

Some take him absolutely for the face value - "he is a professional", "he knows what he is doing", "my money is safe", "he has written books"...

I saw a lot of message posts on Yahoo from suckers who bought Downey Financial mortgage lender after Cramer said that Washington Mutual would be IDIOTS (the exact quote) not to buy it at $100 a share (around $70 back then) just a few weeks ago...Now it trades at around $45-$50...It is not just a bad pick that ticks me off, every investor makes fair share of mistakes - it is his cavalier way of dispensing investing advice after "BUY", "BUY", "BUY", "SELL", "SELL", "SELL", "BOYAH!!!"

I hope there is a special place in Hell for psychics, tele-evangelists, Jim Cramers, sub-prime mortgage brokers, and other BS artists that prey upon feeble-minded and cause them to lose their livelihoods while preaching helping "an average folk"...


P.S. And I do not buy this "I am a journalist" BS. He used to be a hedge-fund manager; this is his claim to fame, not news reporting... he knows that he is causing harm, he just doesn't care..

[mgrotbo]

Thank you all for your comments. I think investors are best served when they can see a spirited dialogue among thoughtful people.

To johnny b. dog -- I would encourage you to take a look at the VesTopia.com website. We are not paid active managers and we do not offer investment advice. It is a unique model that I think will well serve many investors. And I promise never again to promote VesTopia in an investment blog again -- Scout's Honor...

To Vladimir - I agree with you that paid advice is not always better than free advice; the trouble is that much of the "free advice" I see is 1) hard to use, 2) hard to distinguish from simply touting a stock the author owns 3) overwhelming in volume or 4) hard to apply to MY portfolio. The most difficult challenge for consumers of free advice is telling the bad from the good. I think some poeple like Cramer's stuff because he tells them about a stock never before considered. If they are thoughtful and then do their own homework and make an independent decision about the stock - that's great. That's what I do. Blindly following any advice - regardless of the cost - can be very costly for a non-professional investor. And yes, Vladimir - your free advice was priceless =)

To Igor - I think your sentiment mirrors the opinion many professional investors have regarding Mr. Cramer. I am not sure he thinks he is intentionally harming anyone; but perhaps he does not realize that investors who blindly follow him (maybe he thinks no one really does?) can get into big trouble fast.

Thanks again for all your comments...