Many first time visitors to Youthful Investor are either familiar with Jim Cramer or are excited each day to watch his Mad Money. Cramer is always entertaining and very eager to “help the little guy.” However in more recent years his investing style has come under fire. Does he really know what he is talking about? Is he really on your side?
To answer the first question, we go back to Cramer’s time in school. Cramer graduated from Harvard Law School with his doctorate being admitted to the New York Bar in 1985. His university days were spent working long hour freelance jobs at local newspapers. Between studying and working, Cramer left stock picks on his answering machine that impressed his professors and colleagues.
Martin Peretz, owner of The New Republic was so impressed that he gave Cramer $500,000 to invest. Although Cramer’s picks suffered some losses, Peretz maintained confidence and was able to make capital gains of $150,000 in less than two years.
Cramer has elite experience in investing. He was taken on by Goldman Sachs in 1984. He later founded his own hedge fund, Cramer, Berkowitz, & Co in 1987. In his 12 years, only one year returned less than the market average.
Taking his experience and his growing entrepreneurial desires, in 1996 Cramer founded TheStreet, a penny stock I watch long term. This company offers investing advice, newsletters and world market news online through several websites.
His history shows he has the experience and the know how to invest. Let’s delve a little deeper into the ethics of Jim Cramer and if his interests are really toward the investor.
Cramer’s reign as most of us know it on CNBC began in 2005 with Mad Money. What many first time and young investors fail to realize are the SEC laws that Cramer is bound to in regards to his show and The Street through Action Alerts Plus. Check out my review of Action Alerts Plus.
You may have thought, “why does Cramer always advertise Action Alerts Plus Charitable Trust picks” when he talks about a stock? Why is he so quick to advertise his service? This is not an advertisement. Cramer is following the law by telling the viewers that a given stock is within the portfolio so as not to skew his research and work with CNBC, independent of The Street and Action Alerts Plus.
In addition, Cramer is not allowed to trade any stocks he talks about in the show within 5 business days of mentioning it. Conspiracy theorists have questioned this ruling, advocating he personally trades stocks that he does not mention, those that are far better than what he tells his viewers to buy. This is simply not true. Not only is Jim officially retired from investing, but he only trades for the charitable trust.
Jim Cramer makes his money from working for CNBC and The Street. He is worth well over $10 million from his time working for Goldman Sachs and his hedge fund. Besides that he receives income from guest appearances as well as his books.
Another contention viewers have is about Cramers investing track record. Cramer has come under fire, perhaps most famously on Jon Stewart’s program on Comedy Central. In that episode Stewart criticizes Jim for supposedly giving a buy rec on Bear Sterns the day before the financial meltdown in 2008. However the incident was taken out of context and not meant to be a buy rec but rather a vote of confidence in the caller’s money being liquid at Bear Stearns in a brokerage account; not a mention of the common stock. Cramer was right, the money was safe and it was insured.
Controversy has also followed Jim Cramer from his days at his hedge fund. Video clips have leaked recently of Cramer advocating some questionable practices in short selling and getting reporters to drive the price of a stock down to make some quick money. He has later revealed regret at making these comments and hopes that the SEC would be better educated and more involved in cracking down on these practices.
Those who question the returns on Jim Cramer’s buy and sell recommendations have some validity in their arguments but one most take them in the context of who they are directed to. Critics, namely Barons reported those that followed Cramer’s buy recommendations would have returned on average, 12%, about 10% less than the S&P500 in the two most recent years. Although this is positive and a head of inflation, many need higher returns.
This brings me to Cramer’s audience. Cramer’s buy recommendations are not meant to be the same for everyone. The Mad Money program is specifically designed for individuals, and often non-professionals. When Cramer tells a caller to buy, sell or hold that rec is for that individual caller, not you and me. Each person has a unique situation (asset allocation and diversification). By this I mean, we can both hold the same stock but have a different outcome due to the other stocks and assets we own. Cramer knows this and is happy to provide individual assistance.
Cramer’s Mad Money is most helpful because of the research he presents and the questions he asks. He enables you to think for yourself and continue to question a stock or investment. From management interviews to his segment, ‘am I diversified’ Cramer gets us thinking more about our investments. This is his goal. Cramer wants us to be better informed and make better decisions.