Mad at Blodget

February 13, 2007

Henry Blodget at Slate doesn’t think people should be following Jim Cramer’s advice any more than we do. Cramer's army of dedicated fans disagree:

My article about Jim Cramer two weeks ago generated a lot of feedback. For starters, I underestimated how many people take Mad Money seriously. Here are some of the arguments his fans made to me. My responses follow.

1. "Jim Cramer does not think you should speculate with your retirement savings—just your 'mad money.'" If this is true, phew. (I say "if" because I didn't see this caveat in the Mad Money show description or in the introduction to Cramer's new book, Mad Money: Watch TV, Get Rich.) Assuming you define "mad money" as "the amount you would be willing to blow on a weekend in Vegas," you'll be OK. The odds of winning the speculation game—e.g., doing better than a low-cost index fund—are low, but as long as you understand this, there's nothing inherently wrong with speculating. Speculating is fascinating, entertaining, and fun. Unless you have a major talent or information edge, however, it's also a bad investment strategy...

2. "Jim Cramer is right a lot." No argument here. Cramer's a smart guy and an experienced trader, so of course he's right a lot. He predicted Google would go to $500, for example, when most Wall Street analysts were suggesting it might peak at $200. I am not arguing that Cramer is usually wrong. I am arguing that his overall investment advice—try to out-trade the pros—is lousy. A far more intelligent strategy, one that will beat most pros, is to buy and hold a diversified portfolio of low-cost index funds. In the vast majority of cases, this will yield higher returns with less risk, time, effort, and stress than short-term speculation. The good news is, even if you pursue the smarter strategy, you can still watch Cramer's show. Just don't fool yourself into thinking that it will give you a good chance of winning the speculation game...

3. "If you had followed Jim Cramer's Mad Money recommendations, you would have beaten the market." I have seen no studies that conclude that Cramer's recommendations have beaten the market even before costs (and I have seen a couple that have concluded the opposite). In the real world, of course, you can't ignore costs, and costs usually bring even talented speculators to their knees...

4. "Jim doesn't say you should just blindly do what he says. He recommends that do your own research—and he tells you how to do it." At first blush, this sounds responsible and persuasive (and it's certainly more responsible than "watch TV, get rich.") The trouble is that it encourages amateur investors to believe that, if only they watch the show and do a bit of research, they can win the speculation game. The reality is that your odds of winning are low even if you have above-average skill and even if you do nothing but research..."