The Cramer Delusion

As a non-American who often looks up American finance-related sites for share ideas, I often hear of this legendary figure in the investing community, Jim Cramer. He is one of the most omnipresent financial gurus in American media. Yet, I’ve done some research on the internet, and it turns out Cramer isn’t as successful as the media would lead you to believe. So I have compiled a collection of reasons why you shouldn’t bother listening to Cramer:

1. Once Cramer recommends it, it’s overvalued - Because the American public is so eager to mimic all of the investment guru’s ’successes’, once Cramer recommends a stock, the share price often shoots up. This would be okay if the price rise was because of a recommendation from someone who actually knew about investing, like George Soros or Warren Buffet, because these wealthy investors tend to outperform the market. However, CRAMER IS NO BETTER THAN THE AVERAGE INVESTOR in terms of performance, and the research proves it. Some wise investors have even gone as far to think twice about buying into a stock which just so happens to be Cramer-related: for example Thomas George says of a certain Brazilian share: ‘…Only negative as far as I can see is that Cramer has recommended it which is a bit worrying. My thought process generally is [to] short the stock once Cramer has recommended it…‘


2. Cramer caused you to loose money during and long after the tech bubble burst - with his liberal use of optimistic euphemisms like ‘winners of the new world‘, Cramer caused a huge number of smaller investors to loose money on high-tech stocks, even after it was evident that these new-fangled companies were going nowhere - and fast. Often the securities he recommended became worthless, and certainly didn’t achieve the returns that he said they might.


3. During the tech boom, he discouraged diversification - by saying things like ‘[tech stocks] are the only ones worth owning right now‘, even when the non-techs were actually doing okay-ish. Investors could perhaps only have lost about ten to fifteen percent of their life-savings, but with so-called ‘gurus’ ridiculing the cautious, they ended up loosing up to 90% of their life savings.


4. Cramer relies on being controversial/different to everyone else/wrong to keep his radio shows, TV shows, Books, Column on TheStreet.com, etc popular - According to a report by CXO Advisory Group LLC., Cramer often goes against the public sentiment and makes use of sweeping statements and exaggerations to attract the investing community’s attention. The report cites his use of lines like ‘This is the lowest-risk, highest-reward environment possible‘, even though this type of headline argument rarely applies - especially not when he said it in January 2001.


5. He is only a posterboy -for the influential Wall Street bankers. When he says that the masses can make untold amounts of cash trading daily on the markets, the hedge fund managers are comfortably smug that the sharecroppers’ populist leader has convinced the populace to infuse huge amounts of cash and, temporarily at least, boosting the values of their wealthy client’s portfolios, and hence their end-of-year bonuses. (And all this without having to pay a single dime in commission or bribes)

Conclusion

Oddly, most of this information has been around for quite a while, but because of the power the likes of CNBC and TheStreet.com wield, perhaps as little as 10% of the small investor community are aware of the shortcomings of Cramer’s advice. Of course, it goes without saying that we are dealing with people’s lifesavings, and these can’t afford to be mismanaged. It’s bad enough when large institutions are crap at not loosing their customers’ money, but at least there is a chance of legal recourse when this happens. It’s much worse when investors try to do a DIY job and make massive losses because of substandard advice, as the media companies are in no way responsible for the advice that they dish out.

The lesson? Steer clear of Cramer and other Wall Street posterboys, don’t bother read material from dubious sources (both online and in print) and always get independent, nonpartisan, unbiased financial advice before deciding how to act.

Good luck,

~~~~Shane H.