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

Nearly seven months ago, and thanks in no small part to the statement above, I concluded that Jim Cramer was a menace to investors.

It only took a few months for the rest of the nation to catch on. Jon Stewart finally jumped on the bandwagon in March, exposing the man for what I think he really is: an entertaining (or irritating) media personality, but certainly not the champion of the individual shareholder that he often claims to be.

In fact, I consider him to be the closest thing there is to a walking, talking hazard for the individual investor. Now, Jon Stewart may have the jokes, but I have the real reasons why Cramer is precisely that, and why you should take a pass on any investment advice he tries to give you.

Thank you, Jon Stewart!
I continue to fully applaud Cramer's stated goal -- to help people make money by investing in the stock market. But Cramer's outburst in October was a mistake -- plain and simple. And, as Mr. Stewart so kindly illustrated, it wasn't his first time.

You see, when someone issues panic-inducing market calls (as Cramer does from time to time) -- and urges investors to avoid long-term strategies to buy and hold good companies -- the average investor simply gets crushed.

Now, 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 helps contribute to exactly the thing that he's trying to avoid: losing money.

Chances are, most viewers were petrified before Cramer even spoke -- the market's been up and down (and mostly down) more times than a yo-yo lately. Even a very small push these days is likely to convince investors to join the terrified herds pulling their money out of the market.

And half a year later, Jim Cramer appears to be the next Oracle at Delphi as we sit in a market priced about 19% below his initial call. Though I'm happy for those who were able to pull themselves out -- and many did -- it's a disturbing trend to witness.

Between October and the end of November, investors pulled out a whopping $138 billion from U.S. equity funds. Based on what these funds were holding, they were indirectly pulling out of mutual fund mainstays like ExxonMobil (NYSE: XOM  ) , Qualcomm (Nasdaq: QCOM  ) , Johnson & Johnson (NYSE: JNJ  ) , Microsoft (Nasdaq: MSFT  ) , and General Electric (NYSE: GE  ) -- many of which had already been hammered.

Cramer might've saved people some money in the short term -- and I'm pleased for that. But in order to complete the circle, he'd have to tell these people precisely when to get back in. I'm not sure how loudly I heard him yelling on March 6 when we reached that recent market low.

And 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 been progressively selling at historic lows … thereby ignoring the sound and sage advice from names like Buffett, Lynch, Graham, Munger, and Bogle. That's the larger point.

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 in recent months. 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, as Jon Stewart has kindly brought to light, 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 who say they can, it's likely to cost you thousands (if not more).

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 tell you precisely when to get back in.

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. 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, Marvel Entertainment (NYSE: MVL  ) and Costco (Nasdaq: COST  ) . We recommended buying shares of these stocks more than six years ago. Both have thrashed 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 40 percentage points.

As for Cramer ... he undoubtedly has an uncanny knowledge of tickers, prices, and strange catchphrases. 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 of Stock Advisor -- there's no obligation to subscribe.

Nick Kapur owns shares of Marvel Entertainment and Microsoft. 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.

Read/Post Comments (21) | Recommend This Article (61)

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 April 28, 2009, at 2:31 PM, mate1074 wrote:

    S&P dove to 600! He never said to stay out, and was specifically addressing currently needed retirement funds, as I recall. I moved to a mostly cash position some weeks before that, as did most of the pros. I've made more on Cramer's advice (from the his books, not the TV show, and following his advice to do my own homework) than I did with "Foolish" advice.

    Your comments (and sales pitches) are usually better than this cheap shot.

  • Report this Comment On April 28, 2009, at 2:51 PM, garyc27 wrote:

    I think you're being a unfair to Jim Cramer and to thank the obnoxious Jon Stewart is unforgiveable. At least when Jim Cramer is wrong, he admits it and apologizes for his mistake. Jon Stewart (not even his real name) is a smug left wing nut who edited out pertinent comments made during the show you refer to. At least Cramer has guts and he makes a number of good calls.

    I wouldn't trust Jon Stewart with my lunch money.

  • Report this Comment On April 28, 2009, at 3:03 PM, stout4040 wrote:

    A while back Cramer was getting on to Exxon for not spending more money on drilling. His words were they need to drill,drill,drill. Now that oil is back down,I think Cramer needs to stay out of the oil and gas business as well.

  • Report this Comment On April 28, 2009, at 3:12 PM, Maurice2 wrote:

    I agree, this is very unfair. No one can expect the guy to make every call right. But man, when you look at his major calls (e.g., the Fed knows nothing and his warning in October) they were awfully prescient.

    Remember that the Motley Fool in the late nineties was advocating buy and hold S&P 500 to earn a nice 10% average over the long term?

    How did that work out?

    I don't mindlessly follow Cramer, but I'm currently down only 5%, not factoring in dividends. Don't over estimate the costs of trading if you can miss the big declines.

  • Report this Comment On April 28, 2009, at 3:24 PM, keywestcorona wrote:

    Its easy to see why a lot of pundits have a hard time with Cramer. He makes a subject that normally is impossible to make interesting quite entertaining. In effect, he makes everyone else look stiff and boring. Mr. Kapur has unfortunately made the mistake of watching the "show" and has missed the information contained within. This is a puff piece written around Cramer's Oct 6th quote (which was dead on,) a Today show segment (which even the writer admits was dead on) and a Jon Stewart bit. If Mr. Kapur did his homework (an hour per week, per stock in your descretionary portfolio...) he would see there is much more to Cramer than you can judge based solely on a short quote or two. I certainly wouldn't let my barometer of truth be whether or not Jon Stewart agrees me. Mr. Kapur, I invite you to read the man's books and actually watch a week of his shows...and get back to us. Take off your bias blinders and take a long look.

  • Report this Comment On April 28, 2009, at 4:15 PM, pondee619 wrote:

    But, you see, without mindlessly repeating the same opening line, Nick would be a story short each month. Check for the next incarnation on or about 5/26. Forget the fact the money needed within five years should not be in the market, right Nick, or should we put that money to work in the market?

    The only statment in this, or any other Fool article, that any Fool writer truly cares about is..."Click here to get a free, 30-day trial of Stock Advisor "

    The rest is just cut and paste BS listing as many stocks as possible to be mentioned on your Yahoo news listing to get your attention so you can read "Click here to get a free, 30-day trial of Stock Advisor"

    I am amazed, and concerned, that stuff like this get recommendations.

  • Report this Comment On April 28, 2009, at 6:39 PM, investmentcafes wrote:

    I'll enter with the I agree Jim Cramer can be obnoxious..I Watch him nightly.I agree theres more to any Investment or Trade than meet the untrained eye..but lets also argue some facts about your Supposition...

    A] The market lost 50%...

    B] Bear stearns,Lehman Brothers,FNM,FRE..Country wide,BAC and C..ETC all are Either down 70% or don't even exist.!!!

    C] When do you Advise people to take profits.? or is your management FEE's /Pay Dependent upon the Assets undermanagement? in which case you'd NEVER issue a "SELL"..or you'd be losing money..thats about as bad as paying Ratings agencies to "RATE" CDS/CDO's..that you own and will make money on only by having them Rated very "GOOD" IS/WAS the CASE.!!

    D] Bulls Make Money,Bears make Money...And.?

    Yup those whom don't "SELL" get Slaughtered.

    E} Jim cramer advises what.? do one hour of homework for each and every Stock you own and Recommends NOT buying for 5 days after he recommends it DON'T buy after hours...

    F] He Visits Colleges and tries to get the younger Generation,I'm 49, to Learn about the market,Stocks and Investing he Does make Daily Calls that can be bad but whom hasn't.?He Gives his Reasoning and anaylsis for you/Anyone to Agree/Disagree with but he isn't a CON or a FAD or in this for himself is He.!

    G] Good of you to pointout several bad calls he's made sure..but he's also made hundreds of good one's...and Did you Say when Your Clients or anyone should " Get Back In"..or should they have Bought and held and lost 50%.Jim cramer has also pointed out " Exceptionally High Yielders throughout this past 6 months period and his reasons why those Dividends are to say he had to call a bottom or point in time is Irrationally Exhuberent thinking on your part ,he's been doing His job All along, it's those whom haven't done their homework,whom Didn't take some profits and pay to much for other people to manage what they should be doing themselves to a certain extent or have a much better clue about their own portfolio's and Holdings.He's preaching to to get more involved.Let the naysayers whine I'll take Jim's advise ANYDAY,ALLDAY.!

    I Appreciate you pointing out some of Jim Cramers Faults..but let he who is without FAULT Cast the first stone.!.GOD.

    Happy Trails

  • Report this Comment On April 28, 2009, at 7:20 PM, eddietheinvestor wrote:

    I'm not a big Cramer fan, but what bothers me is that viewers can't get objective information about economic/political matters (the two are now tightly intertwined) on CNBC because CNBC is under Obama control. It's hard to make good stock picking decisions when you can't get objective and honest information about companies, such as GE. Here is one example:

  • Report this Comment On April 28, 2009, at 11:29 PM, alohaski wrote:

    cramer ; keep up the good work, (right or wrong) 9

  • Report this Comment On April 29, 2009, at 12:11 AM, HarryCaraysGhost wrote:

    Do a test, Make a portfolio based on the opposite of what Mr. Cramer picks. Last I checked your up. The main problem I have with Cramer Is after I buy, he recommends it a month later. I call this the cramer kiss of death.

    As far as Mf goes there buy and hold strat does'nt always work. I like profits. And what's with all the relentless pushing of their products. How is spending money supposed to make me money in this market.

    I guess I should have put it all into carmax.

  • Report this Comment On April 29, 2009, at 8:16 AM, NoEmotions wrote:

    Cramer and TMF have different investing philosophies. That has to be kept in mind. Also it bears repeating that each of us must do our own homework and take responsibility for our own stocks and portfolio.

    Personally, I watch Cramer and read the WSJ and several other financial mags, online and in print and get a "feel" for what I want to invest in, then I act.

    I have made mistakes such as when TMF didn't suggest selling Garmin when it was at $123 or so. I held on. But Cramer said SELL, SELL SELL in Dec. when GRMN was at $123 (or so). I was a pig and held on and got burned. Select Comfort was another bad deal, but I did get out early in that mess.

    So everyone makes mistakes, even TMF. No doubt I will continue to make mistakes too.

    I don't take Cramer as "gospel", but TAKEN IN TOTO with all other financial sources, including TMF I have found THAT to be helpful.

    By the way, I find the continued Cramer bashing trite and boring. I wish it would stop. It does not speak hightly about the person and company who find it necessary to continually belittle someone else.

  • Report this Comment On April 29, 2009, at 9:37 AM, djpduck wrote:

    Bottom Line, Cramer is right more than you guys. You should pay more attention to him. You could improve your products.

  • Report this Comment On April 29, 2009, at 9:46 AM, TexasTex wrote:

    Pretty narrow minded of ya there, Nick. I have seen plenty of examples in my MF reading where the author got swept up in the moment and popped off and said something that many others would take to task later. As for Jon Stewart, if you use his comments to validiate your own opinions of information given by others, oh brother!

    Jim Cramer has plenty of good advice just like the Fool. Bottom line, do your own due diligence and quit listening to Jon Stewart.

  • Report this Comment On April 29, 2009, at 2:31 PM, 08trader wrote:

    Here's some returns, from 2002-2008:

    Put money in a bank earning interest: more than 15-25% gain.

    Put money in an envelope under your matters: 0% gain.

    Have the exact same stocks as Cramer's Action Alerts Portfolio: -13% BEFORE commissions and BEFORE paying for the Action Alerts fees ($395/month in 2008).

  • Report this Comment On April 29, 2009, at 3:50 PM, PSU69 wrote:

    Jim C. has helped me. I learned a lot from him and from reading his books. He helped me make a lot of money. I like his ability to be critical of himself, rare in humans. Being a very public figure it is very easy for folks to snipe at his errors and not view the body of his work. Clearly, the violent market decline has hurt many reputations and egos. I believe Jim C. tries to learn about ways to teach people about the markets. This is hellping us all. Clearly he makes mistakes taking positions, "HOLD BEAR STEARNS." comes to mind.;) I like the guy and admire his ability to teach. "The Bear Stearns Companies, Inc. (former New York Stock Exchange ticker symbol BSC) based in New York City, was once known for its top risk management talent and was one of the largest global investment banks and securities trading and brokerage firms prior to its sudden collapse and distress sale to JPMorgan Chase in March 2008."

  • Report this Comment On April 29, 2009, at 5:35 PM, guiron wrote:

    One of the major issues w/LTBH is that you might retire around the time of a major downturn, and it will kill your nest egg. A lot of people claim that LTBH is the answer to volatility and it will always come out ahead of short term trading or savings, but I know many people who retired this year or the last few years who would disagree with that. Of course, timing is hard, but if you see conditions like we saw last year in the summer, the worst thing to do is to keep averaging into it. It's good to know when the whole market is oversold and sitting on overvalued/fraudulent assets, especially if it's close to your retirement. In that sense, Cramer did much better than Motley Fool or any other traditional LTBH approach.

  • Report this Comment On April 30, 2009, at 8:41 AM, etamar2 wrote:

    Getting personal against your competition is bad marketing. Period.

    Not that I like Cramer's style, but reading piece gives me a feeling I am reading propaganda straight from the Wild West.

  • Report this Comment On May 01, 2009, at 4:02 PM, Gamealot wrote:

    Its clear from this piece that the author actually doesn't watch the show. Cramer has had his viewers back in the market for two months now and nightly urges them to stay the course and not be cowed by the bears. If anything I think he is TOO bullish right now we seem oversold and I think being in cash right now is prudent to see what happens in the next few weeks (see articles by Doug Kass over on the Street who seems to have a good bead on the market lately).

    Look I am sure you can pick a few stocks that you identified and over the past few years and they have turned out to be great. But I get the stock advisor and the % gains right now are not so great over the long haul for the whole portfolio. Where would those gains be if you managed to sit out some of the shaky times? A lot higher. You CAN time the market at a gross level - you HAVE to time the major market moves enough to detect that things are amiss and it's time to be on the sidelines for a while and see what happens. You will miss some 10% ups and some 30%'s a win. Everyone saw the last two blow ups coming if you were looking even a little closely - you just can't say when exactly. You might sit out for a whole year and miss some ride up - but if you aren't selling that ride up is meaningless when it is followed by a 30-50% crash down. My market philisophy going forward is now set to avoid those crashes because the ones in 2000 and 2007 have wiped out any retirement gains for the last 15 years for me. And for your stock advisor portfolio taken as a whole.

  • Report this Comment On May 02, 2009, at 4:59 PM, NOTvuffett wrote:

    I have been investing in stocks for less than a year. I thought I would be a buy and hold investor, didn't know much about it. Put my money in then watched it get cut in half- couldn't stand to look at it most days. I didn't panic and sell, sell, sell- I decided needed to educate myself and change course. So i looked to TMF and Cramer and others. The point is despite if one agrees or disagrees with an opinion expressed by these sources, it makes you think. Hey Jim if you are out there, thanks for your help. I prefer your advice over that loathsome clown Jon. And thanks to you TMF also, you have given me much useful information.

    I have both long positions in companies that I believe will have a good market position in the 5-10 year time frame, and short term positions that rely on the psychology of the current market more than anything else. It is the short term trading that has let me restore the value of my stock portfolio. When we have a more regular market, these types of profits will be more difficult to achieve but the early investments in the long positions should shine then.

    While I am typing something probably nobody will see, the thing that helped me most was the decision to buy stocks in small chunks that so that I wouldn't get emotional about the decision. It increases transaction costs, but it helps you sleep better at night. If you call it wrong- no big deal. Can make riskier bets and if it goes well it feels like free money.

    By the way, I think the last two words that were going to sink Bill Gates were "open source", now they are "cloud computing"?- is this the same thing in a different dialect?, lol.

  • Report this Comment On May 03, 2009, at 12:50 AM, jerseychris wrote:

    Check the performance of your whole list of "Best stocks for 2009" by Jim Mueller before you criticise Cramer. I wouldn't wish that group on Jon Stewart.................Yes I would.

  • Report this Comment On May 03, 2009, at 1:07 AM, ipfmanager wrote:

    Here's some returns, from 2002-2008:

    Put money in a bank earning interest: more than 15-25% gain.

    Put money in an envelope under your matters: 0% gain.

    Have the exact same stocks as Cramer's Action Alerts Portfolio: -13% BEFORE commissions and BEFORE paying for the Action Alerts fees ($395/month in 2008).

    How bout the S&P??


    Action alerts looks pretty good.

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