Why You Shouldn't Listen to Jim Cramer

"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.

Read/Post Comments (14) | Recommend This Article (15)

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 November 24, 2008, at 5:10 PM, ilovesum wrote:

    Cramer says so many things he is bound to be right sometimes.

    Unfortunately this statement was atrocious.

    If he knew what he was doing he should have said this a year earlier , ie the peak of the market not the trough.

    Maybe the he was in panic mode as well . The sky is falling !!!

    I find his show to be a waste of time and don't bother with it.

    Reading ANYTHING that Warren Buffett says is a million times more wise and correct than Cramer will ever be.

    After watching , I tried his tips , they were a disaster .

    If he ran his hedge fund like he does his show I can't imagine how he made any money .

  • Report this Comment On November 24, 2008, at 5:24 PM, matsbox01 wrote:

    Personally, I believe in the world of 24x7 media coverage, we will continue to see accelerated reaction/response to any level of news. The rude truth involves whether the credibility of the news is fact-based. Rumors of Job's health, and potential demise, jolted Apple's stock. Cramer's uncanny ability to stir the pot. Perhaps the media itself should be held accountable to factual bias in its reporting with each quarterly statement...

  • Report this Comment On November 24, 2008, at 5:38 PM, gaucho420 wrote:

    I would say that only the idiot investor would take Cramer's word as gold...he has been right many times and he has been wrong just as many. The point is his show gives you ideas and insights you may not have otherwise thought of, but as he always says, due your own DD and make your own decisions.

    I can't hate on Cramer, the entire world has been wrong except for a very few, the only difference is Jim's smart enough and able enough to have made a show (and a highly entertaining one) out of his job.

    If you want the REAL poster child of this BS, look no further than S&P and Moody's who have once again failed miserably at assessing risk...that's their job, and its not for entertainment! Cramer gives you HIS OPINION...S&P and Moody's are supossed to be accurate and more than just an opinion.

    Hate the game, not the player.

  • Report this Comment On November 24, 2008, at 6:33 PM, viking2boot wrote:

    I quit listening to Cramer when he said to buy UNH in July of '05. I did and it TANKED. He needs to have duck tape applied to his mouth and writing equipment! He really doesn't know what he's talking about.

  • Report this Comment On November 24, 2008, at 7:36 PM, dividendgrowth wrote:

    Cramer made the perfect call on Oct 6.

    Despite the monster rally of the past 2 days, S&P is still down 20% since call.

    But here lies the problem: he's only about 50% of the times right, and makes him useless.

  • Report this Comment On November 24, 2008, at 8:19 PM, PaulEA wrote:

    Isn't this article doing the exact same thing as Cramer-- Picking one specific time and making it sound like this is how it has always been. Take a look at Motley Fools Stock advisor picks over the last two years -- Apple and Berkshire have tanked since they recommended them. I made a ton of money with their Gamestop recommendation but not in it now. Take a look at most stock pickers, they will probably be wrong 50% of the time over the long run. The key is for your winners to make more then your losers.

    There is no magic guru or perfect indicator to get in or out of stock. If you would bought RIMM in early 2000s at $1.50 -should you have sold it at $140, 100, 90, 75, or 50? Sure you still made a ton of money but 10,000 shares would have made you a millionaire at it's peak.

  • Report this Comment On November 24, 2008, at 9:20 PM, yetanotherguy wrote:

    I personally enjoy kicking Cramer occasionally, it has become a great American past time for years. But this reminds me of the famous interview with Raquel Welch had with Johnny Carson where he asked her to move a cat... It never happened though everyone saw it. If was folklore, the same is true with the Cramer Interview.

    The interview may have happened, but it is taken greatly out of context. Yes Cramer was upset and freaked out about the market crashing.. but hey, he is a guy who spends his whole life in the market, of course he's going to be more upset than most people.

    But he was CLEAR.. ONLY IF YOU ARE GOING TO NEED YOUR MONEY IN A SHORT TIME FRAME.. And yes, that was real sound advise. So to Cramer, I say thank you... Hey, this time you were right! Tomorrow I will be posting swearing at you.. But I'm kinda bummed when you get blamed pretty grossly out of context. He just has a "Please Kick Me" sign taped to him most of the time.

  • Report this Comment On November 26, 2008, at 12:06 AM, tcs65 wrote:

    I think Cramer's appearances should be limited to once per week. It's impossible to be smart 5 days every week and he appears to have lost a lot of the magic he had when he started the show due in part to over-exposure. Of course everything was going up then as well.

    He not only blew the natural gas call, he also touted Rite Aid as last year's stock of the year! He also turned away from Apple way too early.

    I think he must struggle to have enough material.

  • Report this Comment On November 29, 2008, at 5:40 PM, goatsnuff wrote:

    He has told you when to get back in if you would listen.

    Wide spread buying on the way down.

    Buy 5 good div stocks

    25 shares @8500

    50 shares @8200

    100 shares @7900

    Sell 50 @ of each at 8800, sell 50 of each at 9500 and keep 75 to let it ride.

    If the market goes to 14k at least you have the 75 left,

    If the market goes back downl start the process over at 8200 this time.

    You need a game plan to play and I think Crammer has laid out a good one.

    Buy em back on the way back down. If the market dumps to 7000 have a cash reserve to buy 150 more.

    If they stay down draw the 4.5 to 7.00% dividend and wait for a better day a few years out.

    Smart Man that Cramer

  • Report this Comment On December 28, 2008, at 4:37 AM, BJG100 wrote:

    The Fool's stock picks are much worse than Cramer's. I subscribed for years, and what, Select Comfort (SCSS) was picked four times! How about all the other repeat picks? Starting at least two years ago, the Fool's monthly picks should have been guides to shorting stocks. Shorting every pick would have yielded a huge return. Buying long got you crushed. The days of "Buy and Hold" are long gone, and you have cost subscribers a fortune with this philosophy.

    I know that my record has beaten yours over the last five years; I bet Cramer's has too. Hire me to write a monthly column, and I'll bet you the entire salary that my picks beat yours!

  • Report this Comment On January 26, 2009, at 1:51 PM, tatsataum wrote:

    << ... -- just like a stock market prediction has nothing to do with the market's movements. >>

    Let's make up our minds, Fools. First you state that Cramer's bear call in Oct. resulted in a market collapse, then you flip-flop per the above. Which is it?

    Not that I'm defending Cramer. He's pretty well worthless, to be sure. But maybe so are you.

  • Report this Comment On January 26, 2009, at 11:54 PM, Notfooled1 wrote:

    BJG100 is on target. As bad as Cramer is, he whips all the Fools. The Gardners and their crew make all their money from SELLING information not from investing. Don't be a fool or a Fool.

  • Report this Comment On January 27, 2009, at 3:53 PM, paducah5102 wrote:

    Well, actually, Cramer suggests a stock or two every night. That's getting back in. He is worth listening to.

  • Report this Comment On March 05, 2010, at 8:26 PM, 34x wrote:

    For all of the negative comment makers regarding Fools,

    why are you talking about them?

    Are you beating them?

    If so, tell us your picks.

    If you are not beating them, may be, just may be,

    you should join them!

    Other wise, don't clutter up the comment page with negatives.

    Clutter it up with your stock picks and share them with us!

    Old Baldy

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