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Jan 23 2010

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Falling Markets and Unmasking Jim Cramer





The U.S. and International markets have dropped, on average, roughly 5.5% over the past 5 days. …more info!

The five day chart shows the emerging markets (EEM) accounting for countries like China, Brazil, India, Thailand, have dropped 6.5% in just 5 days.
 
It also shows the U.S. market, having dropped nearly 5% and the first world International markets having dropped roughly 6.5% in the same 5 day period.
 
I hope that they continue falling, because if fear settles in, then selling could precipitate more selling–which will knock prices down further.
 
Market declines are long term opportunities for patient people.
 
New Investors:
 
You have each seen your personal holdings with the club rise.  For those of you who were able to get your money in by June, you have seen your profits increase by 25%.
 
But your confidence needs to come when the markets drop. That’s when the seeds of wealth are sown.

It’s like buying canned goods at a supermarket.  We know that over time, like the stock market over the past 200 years, they will rise or increase in price.

When there’s a massive sale, we want to load up our carts with canned supermarket goods.  The canned goods may temporarily get cheaper in price, after we buy, but that shouldn’t matter to us.  More than 200 years of history shows us that the prices of these canned goods will rise over time.  If we know that we’ve paid a cheap price, we should be satisfied, and not get caught up in the intoxication of the markets (which nearly everyone does).  And if the price of those canned products decline further after we’ve bought them, we….surprise—buy more of them.

If the markets fall heavily, it will be like a moment of truth for our club.  We’ll need to have the nerve to deposit money so we can buy at wonderfully discounted prices.  Ignore what you see on television.  Ignore what you read in the papers.  Ignore what you read on the internet.  These industries make money based on “viewership”—so they capitalize on people’s emotions.   If you take investment advice from CNBC Squawkbox, you’ll be thoroughly confused, and you’ll go broke in a hurry. Keep track of what they say for a while and you’ll see what I mean.

 Let’s tackle the man who’s probably the most famous television stock prognosticator of all:  Jim Cramer.  Host of CNBC’s Mad Money, the general CNBC viewing public are fooled into seeing Cramer as an investment guru who can help you get rich.  But if you had listened to his top picks and predictions of 2008, the indexes would have hammered you.  I can’t imagine a professional money manager keeping his job after results like this: …read more

David Swenson, who may be history’s greatest long term endowment fund manager refers to Cramer as an investment “Anti-hero” who would melted away investors’ portfolios, if they had listened to him rant about the wealth producing phenomenon of tech stocks at the start of the millennium.  In February, 2000, he recommended buys in Cisco and Yahoo!, among an indiscriminate slew of other tech companies.  And with a vulgar pelvic thrust, he was suggesting that Berkshire Hathaway shares, at $45,000 a share, were “ripe for the banging”—recommending that investors short the stock.  That would have been ugly for anyone listening, as those same shares trade above $100,000 today.   In fact, he regularly hammered old economy stocks as yesterday’s news. 

But he was wrong.

As for Cisco, it dropped from more than $80 in 2000 to about $25 today.  Yahoo! dropped from more than $100 a share to roughly $15 today.  Cramer isn’t good for investors’ educations.  But he still commands top ratings and likely a huge salary from CNBC.

Barron’s concludes that, “the credible evidence suggests that the telestockmeister’s picks aren’t beating the market.  Did you really expect more from a call-in host who makes 7000 stock picks a year?”




Cramer also has a “real-time personal portfolio”, the services of which can be bought for $400 a year.  The average annual return from January 1, 2002 until January 1, 2007 was 4.9%, for a total return of 27.68% (See The Dick Davis Dividend, Dick Davis, pg.202, 2008)

During the exact same time period, our investment club made 10.3% per year, for a total return of 63.26% compared to 27.68% for Cramer’s elite, fee-based information.  And because our stock turnover is lower than his (a lot lower!) we would have pulled much further ahead, in after tax profits.

Anyone getting his rapid fire advice from television would be disappointed to know that Cramer’s TV calls haven’t done as well as his fee-based newsletter has.  And they’d be even more disappointed to know that a little Vancouver Island based investment club has put Cramer’s returns to shame.

Are we great, or is Cramer just a product of the media?  It’s the latter, of course.

Back to the recent market activity:

The markets might not drop further than they already have over the past five days.  But we can allocate fresh money today, at reasonable prices, if you have money to deposit.  What I’m trying to say is that we shouldn’t try “timing” our deposits.  If the canned fruit is selling at a fair price, we buy some.  If it starts selling at a ridiculously low price, we back up the truck, and load up.  If it gets cheaper still, we bring in the mother ship.  We ignore magazines, the internet, television prognosticators and newspapers.  And when we look historically at the best recent times to buy during the past decade (after 9/11; at the beginning of the Iraq war in March 2003; during the economic crisis of 2008/2009) the financial media were nearly all, in unison, scared to death and advocating further declines ahead.

You pay a high price in the stock market for a rosy consensus.  Money isn’t made in the markets when everyone feels good about the markets.

The seeds of wealth are planted when the outlook looks the bleakest.





About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2010/01/falling-markets-and-jnmasking-jim-cramer/

1 comment

  1. avatar
    Investment Fiduciary

    "The seeds of wealth are planted when the outlook looks the bleakest!"

    I like that!

    About Jim Cramer, there is a ABC news piece that is worth reading. Both David Swensen and me are quoted in the piece.

    Michael

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