Thursday, February 22, 2007
Thoughts on Cramer
Anyone who does an over the top show like Mad Money is going to take a lot of heat and criticism, and Jim Cramer certainly absorbs it with very good humor. Actually, the show is not so much chair throwing and weird sound effects as it is homespun investment advice of varying quality. I find I agree philosophically with quite a bit of what Cramer advocates, and disagee with much of it too. As with most things educational, the discerning viewer who watches critically is going to profit.
Some of Cramer's real good points for average investors:
Buy "best of breed stocks." For long term investors with a million or less to invest, (or maybe it's 5 million or less), this is Jim's most consistent and profitable mantra. Not that you can't find a second tier player where the stock will outperform, but if you can buy SLB, why buyPKD or HAL? Now I own a lot of stocks, what Jim would disparagingly call a mutual fund, and it has companies from all tiers. But if you are going to own only 5 stocks as Cramer recommends, or even say ten or less, why not pick the best company in each sector you are going to play? Now intelligent folks can disagree about which company is best at any given time, but basically there is usually a consensus that is correct over the long haul.
Buy a little at a time - Don't establish your entire position immediately. I do this. I also sell the same way, unless I no longer want to own the stock at all, at which poiint I'll pull the trigger on the whole load. Buying a little at a time allows me to dollar cost average or average down by making purchases on weakness. This is one your full service broker will never recommend. Because their commissions are so high, it makes economic sense to limit the number of transactions. They tell you to establish your whole position, since if you expect to get a better price later, you shouldn't be buying at all yet. But stocks never go one way only.
Take profits. The sell discipline is the hardest for amateur investors. They always worry that if they sell, the stock will continue to go up, and they'll leave money on the table. They also worry too much about taxes. Since I sell the way I buy, a little at a time, I have a sell discipline that allows me to pull the trigger, and to absorb the taxable income a little at a time. This has been explained in a prior post.
Do your homework. If you do, there is no reason an individual can't outperform a fund manager. Cramer gets a little crazy about this, claiming you need to spend an hour a week per stock you own. Including reading (WSJ, Forbes and Barrons), checking Yahoo for prices and headlines, and entering my transactions into Microsoft Money, I spend about 13 -15 hours per week, most of it on the WSJ (and a lot of that on general news and op eds). There are about 70 stocks in my portfolios. Believe me, you don't need to spend an hour per stock, unless your focus is shorter term, which Cramer's is. So he lives and dies on every earnings call. I stopped listening to them. The only useful part for me is the Q&A, and when I listen to that, I am only trying to hear what the analysts are worried about and how the company handles the question. Otherwise, the calls are a waste of time.
This is where we get into some areas where I think Cramer's advice is not so good.
You should only own 5 stocks. Baloney. That's not enough diversification, I don't care if they are in five different industries, market sectors, etc. If your portfolio is so small you can only own five stocks, you should be investing in funds. Cramer thinks the average investor can't handle more names because he can't spend more than five hours. Let me tell you, if I owned only five stocks, I'd be hanging on every Yahoo headline, every earnings report, every update, downgrade, upgrade and conference call. Can you imagine living with the possibility of a sickening plunge for 20% of your portfolio at any time? Not me.
Trade on a bad quarter, a moderate move up or down, etc. All this trading, recommending, getting on and off stocks reeks of too short a time horizon for the average investor. Especially if you are working with a full service broker, you can't trade at all. With a discount broker, you can do almost anything, and especially, the gradual ins and outs. Redwavemusings readers know I do about two transactions a week. My average commission with the discount broker is about $6 and about 98% of my transactions are with the discount broker. My full service portfolio hardly chnges at all. So my 600+ dollars in annual costs works out to about 5% of what a low cost mutual fund's implicit and explicit charges would cost for the size portfolio I have. Compared to what a hedge fund charges, it's not even a meaningful cost. That's why I have a chance to outperform fund managers (not saying I outperform them, only that I should).
But overall, I give Cramer high marks for both entertainment and education. With "Wall Street Week" a thing of the past, there has to be some show that spreads the gospel of responsible investing.
And now it's disclaimer time - despite the above, redwavemusings is not an investment advisory source, not is its author an investment advisor. Securities and strategies referenced here may not be suitable for anyone but me, and there is some question about whether they are suitable EVEN for me.
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On 2/21, I bought 50 shares of UIC for the taxable account at 53.01. Today KMX announced a 2-1 stock split, which in theory, does nothing for the value of the stock, but it does put full lots within reach of more investors. In practice, it means that the Company is fat, dumb and happy. Nobody splits their stock expecting it to go down. So it's a welcome event when a stock in my portfolio gets a split.
Some of Cramer's real good points for average investors:
Buy "best of breed stocks." For long term investors with a million or less to invest, (or maybe it's 5 million or less), this is Jim's most consistent and profitable mantra. Not that you can't find a second tier player where the stock will outperform, but if you can buy SLB, why buyPKD or HAL? Now I own a lot of stocks, what Jim would disparagingly call a mutual fund, and it has companies from all tiers. But if you are going to own only 5 stocks as Cramer recommends, or even say ten or less, why not pick the best company in each sector you are going to play? Now intelligent folks can disagree about which company is best at any given time, but basically there is usually a consensus that is correct over the long haul.
Buy a little at a time - Don't establish your entire position immediately. I do this. I also sell the same way, unless I no longer want to own the stock at all, at which poiint I'll pull the trigger on the whole load. Buying a little at a time allows me to dollar cost average or average down by making purchases on weakness. This is one your full service broker will never recommend. Because their commissions are so high, it makes economic sense to limit the number of transactions. They tell you to establish your whole position, since if you expect to get a better price later, you shouldn't be buying at all yet. But stocks never go one way only.
Take profits. The sell discipline is the hardest for amateur investors. They always worry that if they sell, the stock will continue to go up, and they'll leave money on the table. They also worry too much about taxes. Since I sell the way I buy, a little at a time, I have a sell discipline that allows me to pull the trigger, and to absorb the taxable income a little at a time. This has been explained in a prior post.
Do your homework. If you do, there is no reason an individual can't outperform a fund manager. Cramer gets a little crazy about this, claiming you need to spend an hour a week per stock you own. Including reading (WSJ, Forbes and Barrons), checking Yahoo for prices and headlines, and entering my transactions into Microsoft Money, I spend about 13 -15 hours per week, most of it on the WSJ (and a lot of that on general news and op eds). There are about 70 stocks in my portfolios. Believe me, you don't need to spend an hour per stock, unless your focus is shorter term, which Cramer's is. So he lives and dies on every earnings call. I stopped listening to them. The only useful part for me is the Q&A, and when I listen to that, I am only trying to hear what the analysts are worried about and how the company handles the question. Otherwise, the calls are a waste of time.
This is where we get into some areas where I think Cramer's advice is not so good.
You should only own 5 stocks. Baloney. That's not enough diversification, I don't care if they are in five different industries, market sectors, etc. If your portfolio is so small you can only own five stocks, you should be investing in funds. Cramer thinks the average investor can't handle more names because he can't spend more than five hours. Let me tell you, if I owned only five stocks, I'd be hanging on every Yahoo headline, every earnings report, every update, downgrade, upgrade and conference call. Can you imagine living with the possibility of a sickening plunge for 20% of your portfolio at any time? Not me.
Trade on a bad quarter, a moderate move up or down, etc. All this trading, recommending, getting on and off stocks reeks of too short a time horizon for the average investor. Especially if you are working with a full service broker, you can't trade at all. With a discount broker, you can do almost anything, and especially, the gradual ins and outs. Redwavemusings readers know I do about two transactions a week. My average commission with the discount broker is about $6 and about 98% of my transactions are with the discount broker. My full service portfolio hardly chnges at all. So my 600+ dollars in annual costs works out to about 5% of what a low cost mutual fund's implicit and explicit charges would cost for the size portfolio I have. Compared to what a hedge fund charges, it's not even a meaningful cost. That's why I have a chance to outperform fund managers (not saying I outperform them, only that I should).
But overall, I give Cramer high marks for both entertainment and education. With "Wall Street Week" a thing of the past, there has to be some show that spreads the gospel of responsible investing.
And now it's disclaimer time - despite the above, redwavemusings is not an investment advisory source, not is its author an investment advisor. Securities and strategies referenced here may not be suitable for anyone but me, and there is some question about whether they are suitable EVEN for me.
-----------------------------------------------------------------------------------------------
On 2/21, I bought 50 shares of UIC for the taxable account at 53.01. Today KMX announced a 2-1 stock split, which in theory, does nothing for the value of the stock, but it does put full lots within reach of more investors. In practice, it means that the Company is fat, dumb and happy. Nobody splits their stock expecting it to go down. So it's a welcome event when a stock in my portfolio gets a split.
