"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 consider Jim Cramer a menace to investors.
In years past, he's been a subject of cocktail-hour conversation -- "Did you hear what Cramer did on his show the other day?" -- but after last month's 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 this call was a mistake, and it wasn't his first time either.
You see, when someone issues panic-inducing market calls -- instead of long-term strategies to buy and hold good companies -- average investors simply get 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.
And sell they did.
Since October, investors have pulled a whopping $140 billion out of U.S. equity funds. Based on what these funds were holding, they were indirectly pulling out of mutual fund mainstays like U.S. Bank (NYSE: USB ) , Pfizer, Anheuser-Busch (NYSE: BUD ) , Sun Microsystems (Nasdaq: JAVA ) , and IBM (NYSE: IBM ) -- many of which had already been hammered.
Nearly two months later, Jim Cramer appears to be the next Oracle at Delphi as we sit in a market priced well below his initial call.
But while I'm happy for those who were able to pull themselves out, it's a disturbing trend to witness. Cramer might've saved people some money in the short term. Yet in order to complete the full circle of stock market guru-dom, he'll have to tell these people precisely when to get back in. And believe me, I'm waiting to see that.
The truly sad part is that instead of holding onto the steady blue-chip stocks that have historically provided investors with some of the strongest long-term returns, many investors have just sold at historic lows ... thereby ignoring the sound and sage advice from names like Buffett, Lynch, Graham, Munger, and Bogle.
You don't need a weatherman ...
I'll admit that Cramer is entertaining, but no one can consistently forecast the direction of the market as he pretends to be able to do. 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 consistently work out for you. Pick a direction (up or down), and there's a 50% chance of being right -- even though the prediction is rather meaningless.
It's like Punxsutawney Phil. The furry little critter climbs out of his hole and either sees his shadow or he doesn't. Whichever it is, 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.
The scary part is that Cramer has flip-flopped numerous times, calling the bottom already several times this year. While CNBC may gloss over this fact, I've taken careful notice. Don't forget about his theory that 2008 would be the year of natural gas. Ouch.
The talking heads on TV get paid to put on a song-and-dance show and attract viewers. Your education or your personal success is a secondary priority (or not a consideration at all).
Whether Cramer turns out to be right or wrong in the end just isn't the point. The point is that 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 opportunities.
Here's the real problem
In the real world, there are commission costs, taxes, and opportunity costs -- all of which have a tremendous impact on the returns that you're likely to experience.
Every time you pull the trigger in your account, think about your broker and the tax-man doing a little touchdown dance. Much of their income is predicated on you transacting as much as possible.
Take a hint from someone who knows a lot about the hidden costs of investing: 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."
And for those who listened to Mr. Cramer on his recent market call, don't forget that he has quite a monumental task in front of him: he has to precisely tell you when to get back in.
The Foolish bottom line
If you want to make money in the stock market, 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. And 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, Activision Blizzard (Nasdaq: ATVI ) and United Health (NYSE: UNH ) . We recommended buying shares of these stocks 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.
What was 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 24 percentage points.
As for Cramer ... he undoubtedly has an uncanny knowledge of tickers, prices, and strange catch-phrases. 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.
This article was first published Oct. 23, 2008. It has been updated.
Nick Kapur owns no shares of any company mentioned. Pfizer and UnitedHealth are Motley Fool Inside Value recommendations. Pfizer is also an Income Investor choice. UnitedHealth and Activision are Stock Advisor picks. The Motley Fool owns shares of Pfizer and UnitedHealth. The Motley Fool's disclosure policy would never suggest that it could predict or time the market.