Mad Money Machine

My Response to Cramer’s Response to Farrell’s Response

My antennae are not quite as alert to all things Cramer as they once were, so it has taken me some time to come across these two articles from MarketWatch where Paul B. Farrell wrote about how bad it was to watch Cramer’s Mad Money. And then Cramer responded and wrote about how badly Farrell mis-characterized his show. I haven’t seen a further response from Farrell (perhaps it exists?) but here’s how I would respond to Cramer’s quotes from the article:

When I read Paul Farrell’s screed on MarketWatch the other day, the one where he listened to “Mad Money” once, it savaged me. He didn’t talk to me and wrote my show off as a waste of time at best and pernicious at worst. It reminded me how misunderstood both my show and my viewers really are.

Jim, if you are reminded about being misunderstood, what are you doing on your show to correct the misunderstanding?

…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.

Really? I thought I heard “buy, buy, buy” or “sell, sell, sell”. Not exactly words from a buy-and-holder. More about buy-and-hold in a minute…

Believe it or not, my advice on “Mad Money” is for investors who are looking for stocks that will work over the next 12 to 18 months.

And I’d say that even trading within an 18 month time frame is still actively trading. More about buy-and-hold in a minute…

… Yes, I try to get people excited about stocks. 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. That’s what the show’s heart and soul is, and that’s evident from even a casual look-see.

Yes, but individuals shouldn’t own individual stocks. And even more imporantly, people shouldn’t get excited about stocks. Perhaps this is the biggest disconnect. Emotions work against one in investing.

I devote half of a broadcast to rigorously explaining what’s happening and what I expect to happen in the market, and then I load the show up with 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.

But your predictions about the market are no better than your predictions about any individual stock, which is slightly worse than market returns. For me, the best part of Mad Money is learning about the companies and what they do. I never knew about Turbo Chef or Sonic or TransOcean or Crystallex or many others until Jim mentioned them. Nonetheless, I’m not really all that better off for knowing about them. I shouldn’t be buying their stocks, so it actually tends to do more harm than good to get excited about their potential prospects.

Believe it or not, my advice on ‘Mad Money’ is for investors who are looking for stocks that will work over the next 12 to 18 months.

Here’s that 18 month time frame again. Jim, we need to think 18 YEARS not months!

When I say multiple times in every show that investors must do their homework, when I have devoted multiple broadcasts to explaining what that homework should entail, not to mention the book I wrote, “Mad Money: Watch TV, Get Rich,” to encourage and explain homework, I can’t imagine how anyone could think that this advice somehow gets lost in the din.

When we learn that picking individual stocks actually leads to poorer returns than just buying the whole market, we realize what a waste of time doing all this homework really is.

Every Wednesday, I play a game called “Am I Diversified?” to help viewers balance their portfolios. I can understand how someone who hasn’t really watched would miss all of the emphasis I place on such foundational and educational themes, but I can’t see why anyone would write a column about something without getting a little bit familiar with the subject at hand.

I’ve always thought this “Am I Diversified?” game was the silliest thing on the show. How in the world can you say owning 5 stocks is diversified? How about owning 16,000 stocks? Now we’re talking diversification!

… 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.

Hmmm, you’re not really using the same skills as at your hedge fund. There, you traded on an intra-day basis and scraped to make a quarter of a point on each share. Really, how many stocks did you hold at your hedge fund for even 18 months?

Call me crazy if you want, but I just can’t accept that, all else equal, someone who diligently researches his or her stocks won’t make more money than someone who doesn’t.

Jim, please do some research into these lazy portfolios. Their risk vs. return over the long term blows away your stock picking technique. Visit IFA.com and do some reading.

If anything, buy and hold is a completely reckless and irresponsible strategy. This is why I have always preached “buy and homework.” There’s nothing wrong with buying a stock with the intention of owning it for years, as long as you’re willing to check up on that stock every week to make sure that your thesis for owning it hasn’t fallen apart.

Buy and hold of an individual stock as you are suggesting may be irresponsible. But buy and hold of a basket of index funds is genius. No taxes, no commissions, no bid-ask spread, no emotions, no homework.

Too often people regard buy and hold as a license to pay no attention to their investments and hide their heads in the sand when things turn sour. 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.

I can see that Farrell is talking apples and you are talking Microsofts. A misunderstanding of investment styles. We may have owned Enron, but only at 0.1% of our portfolio or less. Meanwhile we own all of the other companies that have done well by the good grace of capitalism. You are talking about buying one stock. Farrell is talking about buying ALL stocks. Farrell is talking Lazy Portfolios. You are talking Mad Money. We need a better dividing line between the two. Investing vs. Speculating. Buy and hold vs. Trading. Apples vs. MSFT. It is the misunderstanding you mention in your first paragraph and it is that misunderstanding you rely upon to entice more viewers, those who are looking to invest.

Having said all that, I’ve got a copy of your new book in which you talk about owning mutual funds. I’ll read and review soon.