Clowns are not just found at the circus. Sometimes they are on otherwise respectable news agencies giving “advice”.
It’s not the purpose of this blog to attack anyone, and I believe in being respectful to everyone. But when I hear things like what the uber-clown Jim Cramer said on CNBC earlier this week, I absolutely have to speak out.
First of all, let me say for the record, Jim Cramer is not an idiot. He is in fact a very intelligent person. And, his knowledge of investments is extensive and impressive. But I consider him a clown because of the things he says and how he has made a name for himself. What exactly is a clown? It’s a character that entertains people by acting in an exaggeratedly goofy manner. And this is exactly what Jim Cramer does.
So what is Mr. Cramer’s goal? To help everyone make money? To give everyone advice on the best way to build a solid long-term investment portfolio? Um…no.
No, his main goal is to attract viewers. And he has built quite a following with his over-the-top theatrics, with bells and whistles (literally!), and also with seemingly knowledgably investment advice. He knows a tremendous amount about the companies he talks about, no question. Yet, numerous studies have shown that his stock picks seriously underperform, as I mentioned in a post last spring. Following his advice is a losing proposition.
But what really bothers me is not that he isn’t a perfect stock picker; who is? Not even Warren Buffett, the greatest investor of all time, is perfect. I’m bothered when I read things like “Stock moves mark the end of the ‘tyranny of the index funds’”. It was one of the most ridiculous titles of an article I have ever read, and it comes from someone who is unquestionably smart enough and knowledgeable enough to know better.
Tyranny?! Yes, someone please rescue me from the tyranny of outperforming 90% of professional money managers with less risk while paying lower fees! How have I been able to live for so long under such horrible oppression??
But for Mr. Cramer, index mutual funds do represent a bit of tyranny, in that when people grow tired of losing money chasing his useless stock tips, they might realize that index funds are the best way to build the core of an investment portfolio, and stop tuning in. Because that is what his show is all about: ratings. Viewers. More viewers equals more advertising dollars, which means more money for Mr. Cramer and CNBC.
It’s clear why he seems to despise index funds so much: they are one of the least exciting things in the investment universe. Mr. Cramer is an entertainer; if he traded in his bells, whistles, and outlandish antics for a serious show about index funds, it would be about as entertaining as a seminar on earthworms or a reality TV show involving competitive knitting.
No, a TV show about index funds is not a ratings topper to be sure. As an investment analyst, analyzing index funds was not the most exciting thing on my To Do list. But it is the best way to invest, particularly in building your portfolio’s core, as I’ve already said. And as I’ve also said many times, the excitement come from watching your portfolio grow and being able to do things you otherwise wouldn’t with less money.
I think it’s perfectly fine to surround your “core” with “satellite” investments such as actively managed mutual funds, individual stocks, real estate, even commodities and alternative investments as long as you allocate your assets properly and minimize the impact of the riskier parts of your portfolio. This is something I will be focusing on in the next several weeks on my blog.
I’d like to address the two key points Mr. Cramer makes in his article, one of which I do not agree with, and the other that he might be right about. First, he seems to be saying that the advent of commission-free stock trading is encouraging more people to buy individual stocks, which in his mind is the right way to invest. He goes on to say that this is particularly true for young people, college students or recent grads, who are largely credited with causing the upward swing in the market, as stocks can now be purchased easier than ever before and with smaller amounts of money.
I agree that buying stocks is easier and cheaper than it ever has been, and that it has contributed to a temporary rise in the overall stock market. And I’ve also said that I am not opposed to buying individual stocks, even just 1 or 2 stocks for people who are getting started in the market. But if this is what you decide to do, I encourage you to also do 2 other things: 1) be cautious, and don’t use money you need for living expenses of for retirement savings; use your “play money”; and 2) start to also build a solid long-term portfolio as soon as you can.
So my disagreement with Mr. Cramer on the first point is not about whether or not you should buy individual stocks, but rather his vilification of something that is vitally important if you want to succeed as an investor, if you want to build a good, solid base of growing wealth over the course of your life. And he knows better! He is selfishly trying to boost the numbers of his viewers/followers, and keep ratings from crumbling.
I’ll save my discussion of the second point he makes in his article for a future post, as this post is already pretty long, and point #2 is not as relevant to most investors. In the meantime, watch out for those nasty, tyrannical index funds! Especially if you have an aversion to money.
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