Jim Cramer's Regrettable Investment Advice

Let's get one thing straight: There's a difference between an honest mistake founded on solid reasoning that simply didn't work out, and a mistake whose rationale is so imaginative, Peter Pan would giggle at it. I'd like to share with you two examples of the latter. 

Now, don't get me wrong -- I like Jim Cramer. He's loud. He's witty. He makes people laugh. He's pretty rich, from what I understand. And how can you go wrong by starting your day with an excessively-loud "booyah"? Still, on two very important occasions, our beloved Cramer gave two deeply ill-fated predictions that offer Fools a pair of priceless lessons.

A tale of two tops
The last two market tops -- one in the spring of 2000, the other last October, when the Dow pushed through all-time highs -- had little in common. In 2000, stocks were insanely overvalued, to the point where many knew it was a bubble. The question was when, not if, it would pop. Last fall, the brewing problems were more subtle. Save for a few ingenious hedge fund mangers, most people didn't have a clue that inflation, credit markets, and housing would send markets into such disarray.

Rationality? Sell, sell, sell!
Here's what both market tops did have in common, at least for Cramer: He buried his head under the pillow and pretended logic made no sense. He told investors to discard everything they'd learned over the years as nonsense. He told investors to keep buying stocks just because it felt good. Without peeking, I'm sure you can guess the outcomes.  

Exhibit A: Feb. 29, 2000
Mere days before the market started its multiyear post-dot-com-bubble slide, Cramer wrote an article for The Street.com (Nasdaq: TSCM  ) describing how his hedge fund was taking care of business. Taking money off the table? Selling stocks that had no revenue, no earnings, no assets, and maybe even no office space? Nah. Cramer's thoughts on the market were bit more direct:

"[Y]ou have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can't make money for you anymore, and that is all that matters. We don't use price-to-earnings multiples anymore at [his hedge fund]. If we talk about price-to-book, we have already gone astray. If we use any of what Graham and Dodd teach us, we wouldn't have a dime under management."

Whoa. "Graham and Dodd," mind you, are Benjamin Graham and David Dodd, the two master investors on whose theories Warren Buffett formed the backbone of his career. Even investors in respectable Internet companies at the time, like Yahoo! (Nasdaq: YHOO  ) , eBay (Nasdaq: EBAY  ) and Amazon (Nasdaq: AMZN  ) , learned that the subsequent market crash hit because investors had ignored what Graham and Dodd taught everyone -- primarily, that the price you pay for a stock determines your returns. Always. No ifs, ands, or buts about it.

Scorecard: Logic 1, Cramer 0.

Exhibit B: Oct. 31, 2007
At the end of October, right before markets began their descent to their current lows Cramer gave out investment advice on his wildly popular show, Mad Money. Here was his game plan at the time:

"You should be buying things and accept that they are overvalued, but accept that they're going to keep going higher. I know that sounds irresponsible, but that's how you make the money. Right now, up is down, left is right, peace is war."

Right, Jimmy. Up is down, peace is war, and prosperity is crying over a brokerage statement covered in red ink. Not surprisingly, stocks that did look quite overvalued at the time -- Chipotle (NYSE: CMG-B  ) , Crocs (Nasdaq: CROX  ) , and Google (Nasdaq: GOOG  ) , to name a few we singled out at the time -- failed to follow Cramer's path to success. And why should they have? There is never a time when you should knowingly purchase an overvalued stock just because your internal Ouija board says it's the right thing to do.

Scorecard: Logic 2, Cramer 0

Foolish takeaway
Yes, I've cherry-picked every bit of information in this article to neatly fit my argument.

Why am I picking on Cramer? Not because I think he's a buffoon, but because the average John Q. Investor can learn a valuable lesson by realizing (a) ditching tried-and-true investment advice never makes sense, and (b) even astute investors can make boneheaded decisions if they let the market's emotional rollercoaster carry them away.

Don’t worry, Cramer. We still love you. Long live excessive shouting and chair-throwing!

For related Foolishness:                               

Fool contributor Morgan Housel does not own shares in any of the companies mentioned. Crocs is a Motley Fool Hidden Gems Pay Dirt pick. Google and Chipotle Mexican Grill are Motley Fool Rule Breakers selections. eBay and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 27, 2008, at 5:50 PM, Matt8265 wrote:

    Jim Cramer is regrettable. I boycott any product that is advertised within 30 minutes of his face.

    Remember Sirius.

  • Report this Comment On August 27, 2008, at 6:08 PM, jjdonov wrote:

    WOW1

    The pot is picking a fight with the kettle!

    How's your track record beyond making a name for yourself by shouting off the rooftops about your AOL pick ten years ago?

    Lucky timing early on, that's all

    Investing is 90% luck.

  • Report this Comment On September 02, 2008, at 3:24 AM, JFrazer1 wrote:

    @jjdonov,

    If investing is 90% luck for you, then you are not very good at it. I say 50%.

  • Report this Comment On September 02, 2008, at 10:37 AM, golfamatic wrote:

    Just finished Cramer's latest book "Stay Mad For Life". Talk about turning Investing 101 on it's head!!! Don't max-out your 401(k)??? (He called the idea nuts.) He called Target-date mutual funds terrible investments. He thinks you only really need 2 mutual funds in a retirement account (if you can't get into the funds on his list): an S&P500 fund and a Bond Index fund. Not a single word about an international allocation for your retirement portfolio.

    Of course, as you would expect from him, he thinks your better off picking individual stocks for your IRAs. He's always looking out for his broker buddies!!

  • Report this Comment On September 03, 2008, at 10:13 AM, KWT8011 wrote:

    Buying stocks in a Roth IRA makes a lot of sense (esp. dividend stocks). And I don't know about you, but I can't pick stocks in my 401k.

  • Report this Comment On September 03, 2008, at 2:22 PM, joshbk wrote:

    "He told investors to discard everything they'd learned over the years as nonsense"

    That's for darn sure. I saw one show where he told viewers that the most crippling myth about stock market investing was the buy-and-hold for the long term strategy. He said - rather, kind of yelled - that investing isn't about buying and holding, it's about buying and selling, and knowing when to sell. (His only point that approached rationality was that buy-and-hold dissuaded the average investor from researching their pick. As if Graham and Buffett would be like, the best thing about value investing is you don't have to do your homework). As if 5 minutes of him blabbering could crumble the edifice of almost a century of carefully thought out stock market research.

    Crammar tries to make everything look simple so that any idiot can invest. And then he tries tear away what the average guy, who's done his homework and has a bit of money in the market, has learned, so that now they have to listen to him for the secret of investing that he only Crammar's aware of.

    He's a parasite in my opinion. But he might make for a good charactar in a sitcom.

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