Ten reasons why Merriman does not trust Jim Cramer:
Reason No. 1: Cramer underplays the costs of active trading.
In his rebuttal to Farrell, Cramer writes, “it’s certainly possible to make a lot of money trading actively, but, as anyone who’s watched the show a few times knows, I don’t encourage ordinary people to trade.” Yes, it’s possible. But is it probable? No. How many studies will it take to convince people that active stock trading is counterproductive?
Reason No. 2: Big promises to viewers are based on shaky evidence.
The implication of Cramer’s pitch is that he will lead you to the investment promised land. Cramer is widely regarded as brilliant. Farrell generously writes: “Jim Cramer is a brilliant trader.”
Nonsense. How do we know he’s brilliant? Because of short-term performance? Remember that the No. 1 mutual-fund manager of the 1970s, David Baker of 44 Wall Street Fund, was dead last in the 1980s. Where’s the evidence that Cramer can produce these stellar returns for his viewers?
Reason No. 3: Cramer as pander bear.
Throughout the article Cramer plays to his followers. “I’ve had the opportunity to talk to thousands of regular viewers, and I have to tell you, they’re smart, they’re sophisticated, and not one of them would ever act on one of my stock picks without first making up his or her own mind…”
Although Cramer doesn’t give any evidence that his viewers are sophisticated or smart in investment matters, he has lots of reasons to want them to believe that they’re above average. He panders to his audience the way politicians now must appeal to the extremes of their own parties. He must keep them thinking they are smart and thinking that he can show them the “secrets” of getting rich.
Reason No. 4: He fails to take responsibility for the risks of his hard sell.
In his rebuttal, Cramer emphasizes how much he wants his viewers to do their homework, and how he offers “caveats, prohibitions, and the occasional warning that investors will lose money if they don’t do their homework or stick to fairly standard, widely accepted investing disciplines.” He goes on: “Not one of them would ever act on one of my stock picks without first making up his or her own mind.” Jim Cramer thus cleverly avoids addressing the implications of his own popularity, the power of entertainment television or his seductive message of achieving wealth with no more than 10 hours a week of do-it-yourself research.
Jim, they have already made up their minds they can trust you.
They may wallow around in some financial information, but in the end, human nature being what it is, they will find the reasons to do what they want. Teenagers do it, and so do adults. We never outgrow our ability to justify anything we want. So here’s a little warning, Jim: If they do their homework and conclude you are wrong, your guru status could vanish.
Reason No. 5: Cramer ignores proven basics.
“Yes, I try to get people excited about stocks,” Cramer writes. “Pardon me for encouraging people to own equities. It’s just that they’ve been proven to generate the best returns of any asset class over a 20-year period. I see and hear people all the time who thank me for getting them into stocks and enabling them to be a better client and a better investor.”
I have nothing against encouraging people to own equities, but I’m hoping they will invest like millionaires instead of like poor people. It’s true that equities have been proven to generate the best returns of any asset class over a 20-year period. But that’s not where the story ends.
I have spoken with thousands of young investors over the past 40 years. One thing I’ve learned for sure is that good savers are likely to have more money than they will ever need if they simply get market returns without paying too much in taxes, commissions or other expenses that come with high turnover. Cramer’s approach encourages them to do exactly the opposite. And it’s possible, by trading, that they will actually lose money even when the market is going up.
Reason No. 6: The noise machine distracts investors from making real money.
Cramer insists that he devotes half of his show “to rigorously explaining what’s happening and what I expect to happen in the market …” That’s part of the problem. This segment leaves viewers believing that the information will make them more money. But in my view it is likely to make them less money. The most famous long-term investors I know claim that most day-to-day news is meaningless noise.
Reason No. 7: Cramer misses real diversification.
Every week, Cramer plays a game on the air called “Am I Diversified?” to, as he puts it, “help viewers balance their portfolios.” I listened to this on a radio and didn’t realize it was a game. I’ve heard Cramer tell listeners that five to 10 stocks represents decent diversification.
According to respected academics, investors should own at least 100 stocks in various asset classes (large, small, value, growth, U.S. and international) to be properly diversified. This historically gives the best return per unit of risk.
Cramer’s emphasis on large-cap growth companies leaves his viewers missing out on some of the most profitable asset classes. The damage can follow those viewers for the rest of their lives.
Reason No. 8: The trader’s “skill set” is wrong for investors.
Cramer: “While I felt that Farrell’s article was wildly inaccurate, I will admit that it was at least a little bit original. I have never before been criticized for telling investors to research the stocks they buy. If Farrell is to be believed, spending an hour per week researching each of the stocks you own is simply a waste of time. I am glad I didn’t listen to Farrell. I never would have made the hundreds of millions of dollars I made for myself and for my investors before I retired. And I am using the same skill sets now every night on my show.”
In fact, the experts who recommend index funds really do believe all the research on individual stocks is a waste of time. Many managers have made big money for themselves and retired young, but that doesn’t mean amateurs can do the same.
Reason No. 9: Cramer misrepresents Farrell’s key point.
“If anything,” Cramer writes, “buy and hold is a completely reckless and irresponsible strategy. This is why I have always preached ‘buy and homework…’ How many nuclear utility stocks did our parents own mindlessly with buy and hold? How many Enrons and WorldComs and Webvans and eToys.coms were bought and held? Don’t be silly, Mr. Farrell: You are the reckless one.”
Come on Jim, you know that Paul Farrell has never recommended Enron, WorldCom, Webvan or eToys.com. In his book, The Lazy Person’s Guide to Investing, Paul recommends many buy and hold portfolios using Vanguard funds. Those portfolios are mostly a balance of large, small, value, growth, U.S. and international asset classes. Cramer’s implication is that Farrell is the reckless guru while he, urging “homework,” is the careful adviser. In fact, the real roles are exactly the opposite, as Cramer would have realized if he had done his homework on Paul’s writings.
Reason No. 10: The record and the proven experts disagree with Cramer.
If Cramer is right and his viewers are doing their homework, why are they still following his recommendations? According to The Motley Fool, 7,676 traders enjoy a better track record than his. Are we talking brilliance or BS?
Cramer’s viewers are so busy they probably haven’t taken the time to read John Bogle’s latest book, The Little Book of Common Sense Investing. If they do, they will find quotes from Warren Buffet, Peter Lynch, Benjamin Graham, William Berstein and the very same James J. Cramer I’m discussing here.
I love Cramer’s quote in the book: “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. Bogle’s wisdom and common sense (are) indispensable…for anyone trying to figure out how to invest in this crazy market.”
If I have to trust somebody to give me advice with the highest probability of long-term success, I’m siding with John Bogle and Paul Farrell. You have to make a choice and the difference may impact the quality of your life when you reach retirement.
Cramer hosts one of the most popular financial shows on TV, for which he is paid a small fortune. Cramer makes it fun, funny and outrageous – good entertainment, in other words. But that doesn’t mean it’s valuable to investors. It does increase Cramer’s value to CNBC. And that brings Bogle to mind yet again, when he said, “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”
There is no question in my mind that Cramer does understand.
© 2007 Paul Merriman
"Money cannot consistently be made trading every day or every week during the year." ~ Jesse Livermore Trading Rule