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Guy Berger

Jim Cramer: Pay No Attention to that Crazy Man on TV

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I know a frighteningly large number of people, including possibly some on this list, actually make investment decisions based on what this (entertaining) maniac says on his show, so please read this.

Jim Cramer has a new book in which he advises most unsophisticated investors not to buy individual stocks, but rather invest in passive index funds. Also attached at the bottom is Henry Blodget's classic article for Slate, " Pay No Attention to That Crazy Man on TV".

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Business Week: Jim Cramer: Mad No More?

2007-12-17 10:18 (New York)

After years of manic rants and crazy antics on live TV, you might

think Jim Cramer's shock value has worn off.

How about this for a new surprise? Jim Cramer, sober-minded personal finance guru.

It creates some contradictions. The hyperactive stockpicker on CNBC's Mad Money has a new book out advising most readers not to buy individual stocks at all. The man who says colleagues called him "Reverend Jim Bob Cramer of the Church of What's Happening Now" is now patiently investing his charitable trust for the long term.

Proud of His Plea to Bernanke

But is Cramer giving up the props, the sound effects, the temper tantrums, and the lightning rounds of off- the-top-of-his-head stock opinions? Is he a new, distaff version of Jane Bryant Quinn? Not a chance.

His proudest moment of the year is an on-air tantrum in the middle of the summer's financial crisis, a plea to the Federal Reserve Chairman Ben Bernanke to take action. "He has no idea how bad it is out there. He has no idea!" he told CNBC's Erin Burnett in what's now a YouTube favorite.

Not long after a mostly calm interview with BusinessWeek in mid-December, Cramer was on TV sucking helium to demonstrate his enthusiasm for a gas distributing company. "I am trying to entertain," Cramer says. "I admit that." But, he adds, he's also trying to help people.

Don't Forget About Your Homework

The new book Jim Cramer's Stay Mad for Life is a primer for saving and investing. It advises readers to pay off credit cards, make the most of 401[k] plans and individual retirement accounts [iRAs], and get the right kinds of insurance. The subtitle of the book, written with Cliff Mason: Get Rich, Stay Rich [Make Your Kids Even Richer].

Most people actually won't get rich by buying individual stocks, Cramer says. Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes. [Guy: It will take a lot more research than that...]

For Cramerites willing to do the research, the book helps construct a long-term, diversified portfolio. For most people, however, he advises low-fee stock index funds.

Henry Blodget Is No Cramer Fan

The new approach might please Cramer's critics, who have worried his focus on trading your way to riches sets a bad example.

Henry Blodget, the former Merrill Lynch (MER) stock analyst who turned writer after being forced from the industry in a scandal, called Cramer a "chair-throwing, self-aggrandizing clown," who gives terrible advice. However, as Blodget wrote in Slate early this year, he's obviously a smart man who knows better. Cramer embodies "the essential conflict in the American financial industry; the war between intelligent investing [patient, scientific, boring] and successful investment media [frenetic, personality-driven, entertaining]."

Now, Cramer is echoing the financial advisers who have long warned that individual investors almost never beat the market. The more short-term trades investors make, the more they tend to lose.

The "Daily Struggle" to Save Money

But in his 14 years as a hedge fund manager, Cramer was a rapid trader, constantly moving in and out of different positions. Lessons from those years found their way into Cramer's previous books and onto many episodes of Mad Money.

Times have changed, he writes. Now, partly due to new regulations on how much information executives can reveal to fund managers, "trying to game short-term movements in stocks [is] almost impossible," he says.

To advise readers and viewers to trade short-term, Cramer says, is like telling them "you too can play in the NBA." A few might be able to do it, but the vast majority won't. "I've evolved to the point

where I see the daily struggle that people go through to just put away $100 a month," Cramer says. It's a more realistic approach. "I wish I wrote this book first," he adds.

Avoid the "Cramer Spike"

But just because Cramer writes a responsible book doesn't mean his viewers will refrain from using his advice in irresponsible, money-losing ways.

The worst example is the "Cramer spike," the jump in price that stocks often make right after they're mentioned on his show. Viewers who buy at these elevated levels will almost always lose money as inevitably the stock drops back to normal a few days later. Cramer warns against this. "I'm pleading with people not to participate in the Cramer spike," he says, urging them to wait before buying.

Cramer's critics might prefer he not do the show at all. "There is a component of people who are not going to listen," but there are many other people who are helped by Mad Money, he says. So the show will go

on. "I'm not going to bow to the reckless people," he says.

Still Criticizing the Fed

Cramer bridles at those on Wall Street who say all his shouting and emotion are getting out of hand. Did he really need to flip out on CNBC last August, ratcheting up the fear and anxiety in an already skittish market? "I'm very proud of that call," Cramer says, saying the Fed really had no idea of the severity of the crisis. Arguably Cramer was proven right by the market turmoil that followed. "I subsequently heard from people at the Fed that it had an impact," he says.

He's still criticizing Bernanke and the Fed, most recently blasting them for not cutting rates enough at their Dec. 11 meeting.

In a lot of ways, this is still the same old, excitable Cramer. The book may contain sober advice on bonds and disability insurance, but he also uses it to rail against a number of targets: 401[k] plans, both for their lame offerings and companies that promote "the most dangerous investment you could ever make" -- buying your employer's stock; the high fees and lousy records of most mutual fund managers; and the journalists who criticize his record as a stockpicker.

A New Leaf?

Cramer says he tried hard to liven up the "stultifying" subject of personal finance. But writing about certain topics, Cramer doesn't try to hide his boredom.

"Investing in stocks can and should be engaging, interesting, and fun," Cramer writes. "Investing in bonds is something that will always be necessary and boring." The new Cramer may be turning over a new,

more responsible leaf. But he's still a stock junkie through and through.

------------------------------

bad advice: How to lose your money fast.

Pay No Attention to That Crazy Man on TV

Why you should never take Jim Cramer seriously.

By Henry BlodgetPosted Monday, Jan. 29, 2007, at 5:48 PM ET Click here to read more of Henry Blodget's Bad Advice.

070110_BA_blodgetTN.jpg It would be impossible to write a "Bad Advice" column about investing without discussing Jim Cramer. I have been through several stages of feelings about Cramer. My initial belief was that the former hedge-fund manager, host of CNBC's hit show Mad Money, and author of several books about speculating was perhaps the worst thing to happen to the financial security of average Americans since the crumbling of the Social Security system. I developed this theory in the early Mad Money days, when Cramer's stock-picking track record—if on-air shouts, blurts, and Tourette's-style tics can ever be called a "record," which, in a serious context, they obviously can't—remained close enough to market averages that Cramer was not laughed out of town when he suggested with a straight face that he was giving good advice.

His claim, of course, was ludicrous: Over short time frames, even orangutans have about a 50/50 chance of beating the market, especially when ignoring risks and costs, so his pointing to a several-month record as evidence of good advice was absurd. In 2006, however, when the performance of Cramer's ravings relative to the market went south, he downplayed the idea that he could help viewers whip Wall Street, and, instead, said that he had "just one goal in mind—to help you make money." According to one observer, he apparently failed to clear even this low hurdle last year despite nearly every major equity market on earth being up between about 15 percent and 30 percent.

As readers of this column and the "Wall Street Self-Defense" series know, when investment gurus start patting themselves on the back for "making you money," they are condescendingly presuming that you know almost nothing about investing. When you own a diversified portfolio of stocks, it is rarely the stock selections that make you money but the performance of the stock market overall—which, thankfully, usually goes up. What a truly talented stock-picker will do is select stocks that beat the market, after costs, without exposing you to more risk than the market. Because the vast majority of stock-pickers can't do this, you are almost always better off in a diversified portfolio of low-cost index funds. Properly constructed, such a portfolio will, over decades, make you more money, with less risk, than even an above-average stock-picker (let alone a chair-throwing, self-aggrandizing clown).

But the more I thought about Cramer, the more I realized that pointing out that he gives terrible investment advice would be like pointing out that the sun rises. Worse, I would be dismissed as a wet blanket who didn't get that the point of Mad Money was just to have a bit of ironic fun. I mean, of course Jim Cramer gives terrible investment advice—we all know that, right?—and we only watch the show because, well, because he does possess a certain bizarre type of market and entertainment genius—if there's a pundit out there with more opinions about more stocks, I've never seen him—and he's irreverent, madcap, and, yes, even brilliant, in an idiot-savant, freak-show sort of way. (Moreover, Cramer is mesmerizing reality TV. Admit it: You watch because you wonder if this is the night he finally has a heart attack, kills someone, or explodes in a tirade of expletive-laced slander.)

Reviewing the list of common Mad Money show segments (Stump the Cramer, Am I Nuts?, Pimpin' All Over the World) and sound effects (squealing pigs, a wrecking train, a toilet flushing, a screaming man falling out a window and then crashing on the ground), I realized that, yes, I was taking Jim Cramer waaaaaay too seriously, that his nonstop comedy routine about being a brilliant and respected investor and making everyone rich is just shtick, and that there couldn't possibly be a Mad Money viewer who actually believes that he provides intelligent advice.

There is, of course, another James J. Cramer—the one who graduated from Harvard Law School, writes an often sober and astute column in New York magazine, and might actually have put up decent numbers at a hedge fund in the 1990s (link) impossible to say for sure until we can evaluate year-by-year relative returns, risk profile, standard deviation, etc.). That Cramer is a smart man. Smart enough to have read decades of conclusive research about the lousy odds facing all speculators— especially amateurs; smart enough to understand the crippling impact of research, transaction, and tax costs; smart enough to know that when a stock tip is delivered on national television it is no longer of any use (because everyone else now has it); and smart enough to write, in 1999, about an excellent book by a true hero of individual investing, John Bogle, that "After a lifetime of picking stocks, I have to admit that Bogle's arguments in favor of the index fund have me thinking of joining him rather than trying to beat him."

The two Cramers—brilliant James J. and vaudeville comic Jim—embody the essential conflict in the American financial industry: the war between intelligent investing (patient, scientific, boring) and successful investment media (frenetic, personality-driven, entertaining).

Edited by Guy

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IIRC, Cramer has had some significant problems with the SEC regarding market manipulation.

Edit: Oh right, this was the guy who was idiotic enough to describe his illegal market activities in a TV interview.

http://www.youtube.com/watch?v=GOGLvxqAk4A

Edited by J Larsen

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I caught his act a few times back when he first came on.

Anyone who would buy anything based on his 20-second snippets is nuts.

I agree with the broad index approach, augmented by a couple of more focused funds (international, small cap) and a select few growth stocks.

Then sit back and dollar cost average.

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It blows my mind that shameless corrupt shill Henry Blodget actually has a column on Slate. :lol: Does anyone read that shite? [i couldn't bring myself to; skipped over the HB passages in above post.]

Edited by T.D.

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Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes. [Guy: It will take a lot more research than that...

Nonsense. A person does not have to spend 52 hours a year (or more) for each stock owned to "beat the market," that's just silly.

Cramer is an ass, but at least now what he's preaching makes more sense, especially compared to his previous churn churn churn ways.

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Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes. [Guy: It will take a lot more research than that...

Nonsense. A person does not have to spend 52 hours a year (or more) for each stock owned to "beat the market," that's just silly.

Cramer is an ass, but at least now what he's preaching makes more sense, especially compared to his previous churn churn churn ways.

I agree that people experienced in following the market don't need to spend an hour per week per stock to beat the market. However, someone inexperienced could easily spend more time and still underperform the market. I maintain that it is relatively simple to identify an undervalued security*. It is far more difficult to predict exactly when it will stop being undervalued, and that is the skill that really leads one to making money.

*It is at least as easy to identify an overvalued security, but generally more expensive and time consuming to profit in that situation.

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Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes. [Guy: It will take a lot more research than that...

Nonsense. A person does not have to spend 52 hours a year (or more) for each stock owned to "beat the market," that's just silly.

Cramer is an ass, but at least now what he's preaching makes more sense, especially compared to his previous churn churn churn ways.

I agree that people experienced in following the market don't need to spend an hour per week per stock to beat the market. However, someone inexperienced could easily spend more time and still underperform the market. I maintain that it is relatively simple to identify an undervalued security*. It is far more difficult to predict exactly when it will stop being undervalued, and that is the skill that really leads one to making money.

*It is at least as easy to identify an overvalued security, but generally more expensive and time consuming to profit in that situation.

... and then there are those stocks that are "perceived" to be wildly overvalued, but nonetheless outperform the market. ... Google pops to mind.

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Just as it is more difficult to predict how long a stock will stay undervalued than it is to identify an undervalued stock, it is also more difficult to predict how long a stock will stay overvalued than it is to identify an overvalued stock. In my view, what makes sucessful investing difficult is that it is sometimes profitable to go long on an overvalued stock or to go short on an undervalued stock (depending on your time horizon).

Edited by J Larsen

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I once read a George Soros quote (unfortunately, I've never been able to find the exact source) about the importance of "riding the false premise as long as possible"... :g

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I don't own Google, or know enough about it to say one way or the other, but it was clearly an undervalued stock at $200, $300, $400 ....

I guess the point is, there are "value" plays and "growth" plays. A value assessment won't yield you any growth stocks, and vice-versa.

Just have to find the right mix and comfort level so that you're not stressing when your Google tumbles $40 in a day (only to rise $60 the following week).

Course, if the economy goes in the tank ... :blink:

Edited by papsrus

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A value assessment won't yield you any growth stocks, and vice-versa.

I disagree with that. A properly executed value assessment should identify attractively priced growth stocks. That being said, I recognize that in the popular investing lexicon, "value investing" tends to refer to sticking with the tried-and-true names, while "growth investing" tends to refer to a focus on the up-and-coming names (although I have been floored by some of the blue chips that have been tagged "growth stocks" over the years). I personally find that focusing exclusively on one type of company or the other is a poor strategy.

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I agree that people experienced in following the market don't need to spend an hour per week per stock to beat the market. However, someone inexperienced could easily spend more time and still underperform the market.

Yes indeed. One could spend a lot of time consuming garbage and get nowhere, other than wasting time and getting poorer.

I maintain that it is relatively simple to identify an undervalued security*. It is far more difficult to predict exactly when it will stop being undervalued, and that is the skill that really leads one to making money.

I've always found the question of when to sell to be much more difficult. Even when you're right, due to the transaction costs & taxes, along with finding the right place to reinvest the proceeds and how the sold stock moves in the years following....A lot of things you have to get right!

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A properly executed value assessment should identify attractively priced growth stocks....

Fair enough. But it won't find you those "overpriced" growth stocks, which can, and often do, outperform both the broad market and a given basket of value stocks. In any case, it all comes down to finding the proper mix to feel comfortable with. A few growth stocks mixed in with broad market index funds, etc., can work well. I just wouldn't follow old Cramer's guidance on any of it.

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I think we are saying the same thing in different ways. :tup

You are correct that by sticking to comparing dcf valuation to observed prices, you will miss out on potential profits to be reaped from going long on overvalued stocks that continue to increase in value. For instance, I did not enjoy the benefits of RIMM's recent multiple expansion from around 60 to around 100 (those numbers are off the top of my head and are only roughly correct). To my mind, these profits are won by the so-called "momentum investors." I briefly experimented with this approach in a phoney portfolio and found that I completely sucked at it; it seems to me to be much more driven by luck than other approaches.

Edited by J Larsen

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Hmph. A bunch of technicals fans... :beee:

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Absolutely not. I think technical analysis is a bunch of bullshit.

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Absolutely not. I think technical analysis is a bunch of bullshit.

Have to disagree. Technical analysis is a tool. It's isn't the "answer"--nothing is. But it can be a useful tool. If you don't think the market doesn't pay attention to support and resistance levels, you're nuts! :P

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Absolutely not. I think technical analysis is a bunch of bullshit.

Oops...sorry; got my terminology wrong, now that I think about it! :lol:

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Absolutely not. I think technical analysis is a bunch of bullshit.

Have to disagree. Technical analysis is a tool. It's isn't the "answer"--nothing is. But it can be a useful tool. If you don't think the market doesn't pay attention to support and resistance levels, you're nuts! :P

I realize people pay attention to these things, but I still maintain that it is a bunch of bullshit. Now there is constantly all kinds bullshit affecting the market, but I tend to disregard it because I find its impact to be much less predictable.

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Cramer was much more interesting before he bacame that charicature of himself on "Mad Money". He actually had some worthwhile things to say. He even appeared on such shows as Charlie Rose.

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Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes. [Guy: It will take a lot more research than that...

Nonsense. A person does not have to spend 52 hours a year (or more) for each stock owned to "beat the market," that's just silly.

Cramer is an ass, but at least now what he's preaching makes more sense, especially compared to his previous churn churn churn ways.

I agree that people experienced in following the market don't need to spend an hour per week per stock to beat the market. However, someone inexperienced could easily spend more time and still underperform the market. I maintain that it is relatively simple to identify an undervalued security*. It is far more difficult to predict exactly when it will stop being undervalued, and that is the skill that really leads one to making money.

*It is at least as easy to identify an overvalued security, but generally more expensive and time consuming to profit in that situation.

I'm curious -- since you guys (if I understand you correctly) believe that there is a way to routinely generate returns beyond those of a simple market index without a greater degree of risk as a freelance investor while doing less than 52 hrs of research per year, have you succeed in doing so?

(I don't intend this to sound confrontational, but I am curious.)

Guy

Edited by Guy

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Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes. [Guy: It will take a lot more research than that...

Nonsense. A person does not have to spend 52 hours a year (or more) for each stock owned to "beat the market," that's just silly.

Cramer is an ass, but at least now what he's preaching makes more sense, especially compared to his previous churn churn churn ways.

I agree that people experienced in following the market don't need to spend an hour per week per stock to beat the market. However, someone inexperienced could easily spend more time and still underperform the market. I maintain that it is relatively simple to identify an undervalued security*. It is far more difficult to predict exactly when it will stop being undervalued, and that is the skill that really leads one to making money.

*It is at least as easy to identify an overvalued security, but generally more expensive and time consuming to profit in that situation.

I'm curious -- since you guys (if I understand you correctly) believe that there is a way to routinely generate returns beyond those of a simple market index without a greater degree of risk as a freelance investor while doing less than 52 hrs of research per year, have you succeed in doing so?

(I don't intend this to sound confrontational, but I am curious.)

Guy

Well, that's not the proposition you originally set forth, which was 52 hrs per stock per year.

And yes, I have succeeded in beating the market, regularly. Look at it as an economist, it is tempting to believe that this should only happen by chance, because the markets are efficient, etc. But the reality is that there are some very, very big players out on the market that an economist would view as "irrational." For instance, there are managers that control hundreds of millions of dollars in investments that play momentum strategies, which tend to lead to market overreactions to events. A person like me, who is willing to be flexible with his investment horizon and doesn't mind a little extra risk, can turn this type of occurrence into a handsome profit. That being said, I have the advantage of having studied market behavior intensively for the last few years, and I monitor the markets as part of my job.

Which reminds me, I will probably be posting very rarely from now through the next few months, due to work obligations and extensive business travel. So if I don't reply to this thread anymore, that's all that is going on.

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Cramer's strained theatrics make it impossible for me to watch him.

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Cramer was much more interesting before he bacame that charicature of himself on "Mad Money". He actually had some worthwhile things to say. He even appeared on such shows as Charlie Rose.

How the heck does one interpolate an appearance on Charlie Rose into anything positive? Rose seems to be THE biggest phony on American television. Sometimes his interviews are good comedy.

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