Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now."
-- Jim Cramer, Oct. 6, 2008, S&P 500 at 1,056.89
With that statement, I now consider Jim Cramer a menace to investors.
He used to be a subject of cocktail-hour conversation -- "Did you hear what Cramer did on his show the other day?" -- but after his recent melodramatic meltdown on the Today show, he's the closest thing to a walking, talking hazard I can think of. Why? Let me count the ways.
I fully applaud Cramer's stated goal -- to help people make money by investing in the stock market. But I'm generally one of the people with a drink in my hand, shaking my head over stories of the latest episode.
You see, when someone issues panic-inducing market calls -- instead of long-term strategies to buy and hold good companies -- the average investor simply gets crushed.
Cramer's Today show plea was grounded in a sound reality -- Fools should never have money they need during the next five years in the market. But by advising people to indiscriminately sell, he's just helping to decimate their portfolios.
Chances are, most viewers were petrified before Cramer even spoke -- because the market's been up and down (and mostly down) more times than a yo-yo lately. Which means even a very small push was likely more than enough to help investors join the terrified herds pulling their money out of the market.
That's right -- at the end of last week, investors pulled a whopping $52.1 billion out of U.S. managed funds. Based on what these funds were holding, they were indirectly pulling out of mutual fund mainstays like ExxonMobil (NYSE: XOM ) , Procter & Gamble (NYSE: PG ) , Johnson & Johnson (NYSE: JNJ ) , Microsoft (Nasdaq: MSFT ) , and General Electric (NYSE: GE ) -- many of which had already been hammered.
And so, instead of holding onto the steady blue-chip stocks that have historically provided investors with some of the strongest long-term returns, panicked investors are likely to sell low … thereby ignoring the sound and sage advice from names like Buffett, Lynch, Graham, Munger, and Bogle.
You don't need a weatherman …
No one can consistently forecast the direction of the market. I repeat: No one can consistently forecast the direction of the market.
It moves completely randomly and unpredictably over the short-term -- and therefore trying to make a "call" on the market won't do you much good. Pick a direction (up or down), and there's a 50% chance of being right -- even though the prediction would be meaningless.
Don't be like poor Puxatawney Phil. The furry little bugger climbs out and either sees his shadow or he doesn't, but the result has nothing to do with whether winter is over -- just like a stock market prediction has nothing to do with the market's movements. Because the short-term movement of the stock market is random.
Cramer, for his part, has flip-flopped more often than John Kerry, calling the bottom several times this year. Then there was his theory that 2008 would be the year of natural gas. Ouch.
The talking heads on TV get paid to attract viewers. Education is a secondary priority (or worse). As investors, we can't let their predictions catalyze us with fear -- as it probably has for less-sophisticated investors who don't have much money to play with in the first place.
And that's why I think the Today show gaffe is even worse than his usual performances. Regular CNBC viewers are used to wild, gaseous monologues. Last week's prediction was on network TV!
Whether Cramer turns out to be right or wrong in the end isn't the point. The point is, no one can claim to predict the markets -- no one. If you follow the advice of those that say they can, it's likely to cost you thousands (if not more) in costs, fees, and missed opportunity.
Here's the real problem
In the real world, there are commission costs, taxes, and opportunity costs -- and they have a pretty big effect on the real returns investors get.
The combined result of this, I suspect, is that the average investors playing along with Mad Money have been seriously burned multiple times. Worse yet, they're sends a whopping portion of their hard-earned money to the IRS and their brokers.
Take a hint from someone who actually understands these matters: John Bogle, the founder of Vanguard Investments. He writes: "No matter how efficient or inefficient markets may be, the returns earned by investors as a group must fall short of the market returns by precisely the amount of the aggregate costs they incur. It is the central fact of investing."
Think about that the next time you hear "Buy, Buy, Buy" or "Sell, Sell, Sell."
The Foolish bottom line
If you want to make money in the stock market, you need to tune out the panic -- or the euphoria. You need to remember that no one has any idea where the market is going in the near or medium term. You need to buy shares of great, built-to-last businesses. You need to hold for the long term. You need to keep as much money as you can from the tax man or your broker.
That's what we do at Motley Fool Stock Advisor, and it's paying off. Take two of our best stocks, Marvel Entertainment (NYSE: MVL ) and Costco (Nasdaq: COST ) . We recommended buying shares of these stocks more than six years ago. Both have outperformed the market by incredible margins. I bet we'll continue to hold these two for a long time to come.
The cost of doing all this? Probably $24 in broker fees and $0 in taxes. That's a perfect example of what I'm talking about. In fact, our whole scorecard is beating the S&P 500 by 29 percentage points.
As for Cramer … he's undoubtedly a smart stock guy, and he puts on a rambunctious and entertaining show. But what he sorely lacks -- and what you must never forget in your investing days -- is temperament. It was Warren Buffett who once said that "the most important quality for an investor is temperament, not intellect."
Want to see what else we've recommended and what we're recommending now? Click here to get a free, 30-day trial to Stock Advisor -- there's no obligation to subscribe.
Nick Kapur owns shares of Marvel Entertainment. Marvel and Costco are Motley Fool Stock Advisor selections. Johnson & Johnson is an Income Investor recommendation. Microsoft is an Inside Value pick. The Motley Fool's disclosure policy would never suggest it could predict or time the market.