Wednesday, 30 March 2011 00:00

Mad Money or Bad Advice?

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I think every "value" investor has their what did Cramer just say moments. I certainly fall in that club. I occasionally watch the show to catch interviews with the CEOs that he interviews while I do my daily exercise routine. One rare occasions I will continue watching past that point (I know, I know, what was I thinking?) and one two occasions I listened to what is, in my opinion, really poor advice. The instances and my comments are detailed in the following post..

Before we begin I have to mention that Andy Kilpatrick is coming out with another edition of his classic work on Warren Buffett. Be sure to contact Andy or head to Amazon to order a copy.

Jim Cramer Mad Money Show, 03/10/2011

"Hey listen, I get it... I've been there... caught owning too much stock into a hideous sell-off... a nasty sell-off... like the one we had today with the Dow plummeting 228 points. I've been there, not knowing what to do. The propensity... the desire... to take sweeping, drastic action. And get out now, so to speak. I get it. Why not?

Think about it. It's everything gone wrong... What's gone right? I mean everything. Employment claims at 8:30am today. Reversal of the positive trend. Right back down. China? Clearly slowing. We know that from the deficit number. Tech, hitting the wall. Best themes out there... mobile internet tsunami, tablet... stalled out. Oil. Going down. But because of demand destruction, not the destruction of Colonel Ghadaffi. Spain is collapsing. Oh thanks! Can Italy be far behind? I mean, that's all tied to Libya anyway. Agricultural trade seems dead as a doornail. QE2? On the verge of ending. Taxes going up all over the place.

So how do you resist? How do you resist selling everything?...

Well tonight I'm going to give you your crisis playbook for dealing with this particularly awful, unrelenting moment.

First... this may surprise you... but you do have to sell something. You have to sell something. Too many things are going wrong right now. Way too many. Not a lot of silver linings. And look, I'm a silver lining kind of guy. And not everything you own is equally good. Some of it is probably pretty bad... pretty darn bad.

So I want you to sell something. Hey listen, take a loss. It's okay. First loss is your best loss. Got some big profits in a stock? Don't give them back. Ring the darn register. That's fine. You can always buy it back lower if you really like it, when the risk/reward is more in your favor, and it is not in your favor right now. But... and a big "but"... do not blow out of all of your stocks. Do not panic. That's stupid. Don't blow out of everything. Don't give up on stocks entirely. Don't hide in Treasuries. Do not hide in Certificates of Deposit with those puny yields. Instead, get ready to redeploy your capital into stocks that are selling off, because not all of them deserve to go down. Get ready... get ready in this sea of red to add to something you really like."


Comments like this reinforce my view that watching Mad Money is dangerous to your financial health. I mean seriously if you can't handle a 1.87% one day decline in your portfolio you shouldn't be investing in equities PERIOD.

What Cramer is trying to tell you is that you should always have money on the side to take advantage of market down cycles. That is absolutely something we can agree with him on. We like the motto of the boy scouts: Be prepared. Why pick a down day though to send this message? It's not like any of the issues he speaks about are new issues. Why didn't he pick a day when the market was up a HUGE 1.87% to tell investors it might be a good time to take money out of equities?

He is right in that it's not a time to panic but telling people to sell something and take a loss because of a one day drop is frankly poor advice at best. As I said earlier if you aren't comfortable holding the stocks in your portfolio during a 1.87% drop in the market you shouldn't be investing in equities, it's just that simple.

You should only sell your investments when they are selling above a price that you think is in excess of what your estimates of its current intrinsic value is (and its future intrinsic value growth rate) or when you find a company that you understand that is selling for a significant discount to its intrinsic value. The fact that the market is down 1.87% should not make you want to sell anything.

As concentrated investors we suggest that they only prudent course of action when markets are priced such as they are now is to keep a comfortable margin of cash on hand to take advantage of opportunities that present themselves. If your using margin, stop. You should be able to sustain a nice return over time without it and avoid the downsides of having levered up in an up market.

Further Jim Cramer Shenanigans on Mad Money Show, 03/29/2011

Well once again Mr. Cramer comes out with more shocking financial advice on his television show. I'm sure regular readers of this blog will not fall for his comments but his efforts to "teach" investors is likely to do more harm. Essentially he tells his readers that by listening to him they will profit on the next group of likely momentum stocks. Ignore the valuation he says, we all know they are overpriced, but some suckers are sure to drive the price up. What will likely happen is that he will encourage people to get in they will make some money (maybe) and then the stocks will run up some more and they will get back in and become the suckers that hold on too long.


"Here's what's going to happen. Within the next year, we're going to see IPOs... Twitter, Groupon, Zenga... that's gaming... as well as LinkedIn probably, maybe Facebook... They will be huge deals. I would bet that the smallest one might be Zenga... Zenga at $10 billion. The others will be worth more than that. Maybe much more. Those who get in as venture capitalists will make fortunes here. Those who get in on the IPOs will also make fortunes. But those who buy in the aftermarket? Uh... initially maybe. Later on, hard to say.

As fortunes are being made in these stocks, the critics will come out of the woodwork. And you know who they will be criticizing? Me! Why? Because I will be trying to get you in. I'm going to be trying to make you as much money as possible. And you will make money until it all blows up. And hopefully when it does, you'll have taken so much off the table, that you'll still have a massive win... a net win.

If you go read Confessions Of A Street Addict, I knew the valuations were all wrong during the dot-com bubble. I knew it was absurd. I recognize that it was a repulsive era, and agreed with those who said it was all nuts! That said, there was one big difference... the same difference this time around... I want you to make hay with the bubble, while the sun shines. I don't want you taking counsel with the bears initially. Once we've made a lot of money, that's a horse of a different color.

In other words, I am telling you that I have seen this picture before, and it ends really badly. But... and this is what the naysayers don't understand... you don't have to stay until the end of the movie!

By the way, I don't care that this new crop of IPOs is better than 1999 era batch, because they'll be colossally overvalued anyway. So they're not based on eyeballs or revenues, but so what. It's going to be overvalued. In fact, I'll even stipulate that they're even more overvalued than the bears think. Yet that fact is totally irrelevant. It's an abstraction, at least in the beginning. And I'm willing once again to risk my reputation, both telling you when to get in, and more importantly when to get out. The easiest thing to do is say it's all overvalued and I don't want to play and it will make you nothing!

It's my job to try to make you something. So I will fight to get you in. And then before the movie ends, I will do my best to try to get you out, because that's how real money is played..."

To conclude any fan of Cramer should take heed of this quote by Mr. Buffett:

"I mean, when times are good, it is kind of like Cinderella at the ball. She knew at midnight that everything was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there, the guys looked better and the drinks got more frequent and there were no clocks on the wall.

"And that's what happened with capitalism. We have a lot of fun as the bubble blows up, and we all think we are going to get out five minutes before midnight, but there are no clocks on the wall."

In the quote he is referring to how incentives can influence behavior but the quote is just as relevant for this article. There is no place for momentum plays in a proper investment strategy and Mr. Cramer should be ashamed of himself for using base psychology plays to get people to follow his dangerous investment thesis.

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