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| The Money Madman, Jim Cramer |
I just read an article on Yahoo! Finance noting that the percentage of Americans that hold stocks is down from years past. A recent Gallup poll shows that about half of Americans own stock, down from over 60% prior to the Recession. The Gallup poll indicates that middle class folks like you and me have lost the faith and are less likely to own stock than the higher class, higher income guys and gals. This article on Zerohedge.com written last spring gives a good synopsis.
The investing that I have done for years prior to speculating on individual stocks were with stodgy funds, mostly through Vanguard, that have proven lucrative over the years. My favorite all-time fund and the one that I rely upon to help put my children through college is the Wellington Fund. Close behind that in favorites is the Primecap fund, which my wife and I have held since August of 2000, nearly eighteen years.
Both were actually picked for me by my late grandfather on my mother's side, who staked me to my first investments with a few thousand bucks and said "I'm not telling you what to invest in, but I think that you should invest in the Wellington fund and the Primecap fund." Knowing that my grandfather was an astute investor and always seemed to have a lot of money, I followed his advice and began investing in those two funds.
Through T. Rowe Price, I have invested for years in the GNMA fund (which has not fared well), the Capital Appreciation fund, and the Blue Chip Growth fund. Years ago I invested most of my eggs in the highly speculative and volatile basket of the T. Rowe Price Latin America fund, but I learned my lesson on that and do not have one red (or digital) penny invested in that now.
It is a longer story, like all my stories, but I finally dove into buying individual stocks via an E-Trade account in January of 2011, accomplishing a Resolution early that year to "open a stock trading account and begin trading," something that can be accomplished with a few thousand bucks, but it takes a lot more than that to be successful at it.
I have a friend, now retired, who I worked with for the last eight or so years of his career. For years, I listened to him telling me the price of Ford stock as it rose from near collapse to the solid footing that it has now enjoyed for years. He purchased shares when Ford hit $1 per share around Halloween of 2008, telling me that any company that didn't "take the bailout" was a winner in his book.
My buddy is what you would call "The Millionaire Next Door." Looking at him, you might even mistake him for a bum, often unshaven and wearing the same clothes for the past few decades. He was in special forces in Vietnam and is one of the people who I most respect.
What you would not know is that he is, in fact, a millionaire. And several times over at that. I have read many books and articles from those who claim to have interviewed many millionaires for their studies. I find those very interesting, and I am a guy who reads them.
Personally, I know about a half dozen millionaires, but I do not overtly interview them. I just engage in conversations with them, like I would with you or someone who was not wealthy and successful, or with someone on the opposite end of the spectrum, needing government assistance to survive. I would never name them on this blog, but I find them fascinating. Hence, my choice of moniker in the blogosphere.
I know many more millionaires than that through my job, but do not generally engage in very deep conversations with them. We have business relationships, but sometimes when I get to know them better I ask more questions out of curiosity than ones directly pertaining to our relationship as economic developer and business owner/investor/developer.
Speaking with the millionaires that I know, I certainly find it interesting how naturally they seem to come about money and identify opportunities. They may not be the brightest set of people that I know by test scores or academic standards, but they have the smarts when it comes to figuring out money-making opportunities, and my friend knew that the opportunity was great when he saw Ford trading around a buck per share. His daughter helped him open an E-Trade account, and he purchased 20,000 shares.
By simple math, we can easily figure out that if he still held those 20,000 shares today, purchased for under $21,000, they would be worth about $230 K as Ford closed at $11.49 per share last Friday, April 27th, but made it over $13 per share early this year. Incidentally, he has sold half of the shares a few years ago, netting over one hundred grand in profit and telling me that "now he is playing with the house's money." My friend likes to gamble. A lot!
Why I tell you about this good friend of mine is that he would pop his head into my office at least once per week throughout 2009 and 2010, asking me to guess what Ford is trading at. Sitting at my computer, I would log onto Yahoo! Finance, type in "F" and then tell him, often seeing the green arrow heading up. He would rub his fingers together telling me how much he made on the stock, while I ate my heart out wishing that I had the foresight and money to invest in Ford or some other similar stock getting ready to rise.
It was boring for me to be sending $500 per month automatically to each of my children's 529 accounts at the time, with the hope that someday we would be able to pay for the bulk of their undergraduate costs while my good friend who never made it past high school (but he is extremely smart) made more than that every month in stock gains.
My family was living very frugally at the time (with the notable exception of annual Disney World vacations) and I was wishing that I could invest that thousand per month into the stock market instead of age-based Bright Start 529 plans. I suppose that I could have invested the five grand that we spent those two years on stock purchases, but I would not have traded those two trips for anything. Those were some of the best family times that we have had.
I resolved in late 2010, having recently turned 40-years-old, to open a stock trading account in 2011.
So, in early 2011 I set up an E-Trade account, picking it because that is the platform that my friend used and still uses, and transferred $5,000 into it.
My first stock purchase consisted of buying as close to $1,000-worth of stock in the following four companies:
1. Ford (F) because that is what my friend had purchased over two years ago and was making good money at it. After buying Ford stock and telling him that I did because he did, we chatted about the company and its stock for several years before I sold my shares for a paltry gain of a few hundred bucks. I later purchased more shares to round it out to an amount in the even hundreds in order to sell call options. That is a post for another day.
2. Disney (DIS) because my family loved Disney World. I say loved because my son and I have mostly outgrown it, but it remains "the Happiest Place on Earth" for my wife and daughter. We will be making our triumphant return there this December to witness our daughter march down Main Street USA with her high school marching band. Like Ford, I later purchased more shares to round it out to an even hundred. I bought and sold DIS a few times, ultimately making around a thousand bucks on it.
Had I started my blog when I first intended to, three or four years ago, I had a post name written (I still have lists of hundreds of titles and subjects for posts) as "I Do Not Luv LUV." This is because, like Ford and Disney before it, I later rounded out my shares to one hundred, sold some call options on my shares for very paltry sums, sometimes as low as thirty bucks, most of which expired worthless, allowing me to hold onto my LUV shares. I eventually allowed my last LUV shares to get called away for $14 per share a few years ago, right before it shot up.
Today, the shares trade at $53 per share after peaking around $65 this past January. If I told you how long I waited to get back to even on LUV, it must have been at least three years. Far too long to make $200 bucks or less. Like I said, I am a good stock buyer, not such a great seller.
What About Crazy Cramer?
Right around the time I made this initial stock purchase, I happened across Jim Cramer's show, Mad Money, on CNBC at 10:00 p.m. in the Chicago area. It was a rebroadcast of his earlier show.
Cramer hooked me in right away.
I watched Mad Money religiously for about two years. Not every night, mind you, but enough that I saw it at least half of the time. I would not subject my wife to watching it with me on Friday nights and was often too tired after working late or going to a game, concert, dance recital etc. to watch this Madman.
I purchased several stocks that Cramer gave strong recommendations on including Annaly Capital (which I still own 200 shares of after over five years), Juniper Networks, Nvidia, and the one that I cannot ever forgive him for, Alcoa.
I stupidly bought stocks after he recommended them and, as they say, you learn more from experience than anything else. Not everything that Cramer recommended and I purchased was a dud, but there sure were some doozies.
I recall him strongly recommending Alcoa, calling it "the most undervalued stock in the Dow" at the time. They have since been dropped from the Dow industrial average.
From a January 2011 article by Miriam Metzinger on Seeking Alpha: "Cramer's top Dow pick might not even be in the Dow by 2012, simply because it is a great takeover target. With the worldwide demand for aluminum roaring, Alcoa (AA) has a great year ahead of it. Given the raging bull markets of aerospace, autos and trucks, and increase in infrastructure projects at home and abroad, Alcoa's picture is looking very bullish. The company raised its consumption forecast by 13%, and it is now well-run, with lower debt and strong cash flow. Cramer said it is hard to imagine that Alcoa will remain independent, and there are "two ways to win" with the stock, with its strong fundamentals and its ability to be taken over at a premium. Cramer predicts a 42% gain for Alcoa and would buy some stock ahead of the quarter and more after it reports."
Look up the record. He was wrong. I held Alcoa for several years before I sold it, doing a little better than breaking even because, you guessed it, I sold a call option on it and it got called away. It certainly never gained 42%.
After realizing that Cramer's picks were not all that great, and generally lagged an investment in the S&P 500, I began watching just the opening remarks on Mad Money.
Cramer opens the show (I assume that he still does; I have not watched it for several years now) with a great analysis of the markets as a whole and the forces driving components of it or the entire market up or down. He describes international trade, politics, interest rates, conflicts, natural disasters and other things that may drive the markets in any given day, week, month or year.
Once he starts taking calls and talking stocks, my best advice is to turn the channel or turn your TV off. Once I started just watching the introduction, I felt better about Cramer and things in general. Once he took the first call, I would either switch to local news or turn the TV off. I did not then and do not now want to hear his calls on individual stocks, which would be just slightly worse predictions than throwing a dart at the stock listings in the Sunday paper.
Years after my stock picking mistakes were made, not that I am not currently immune to that, I no longer blame Cramer. Well, maybe a little bit for Annaly and Alcoa, but I blame myself more. Who would buy a stock because a bell-ringing yahoo on TV is schilling it? Well, I did, for one and I am certain that I am not the only one. He so fervently believed in the above-mentioned stocks, and many others, that it was hard for a newbie stock picker to doubt the man. He did, after all, make hundreds of millions as a hedge fund guy.
To bolster the claim of Cramer's ineptness in stock picking, I read several articles about his performance on financial websites. I went into it with an open mind, searching the term "Jim Cramer's stock picking performance."
According to an article by Jennifer Booton last May on Marketwatch.com, "CNBC TV personality and “Mad Money” host Jim Cramer has built a lucrative career as a stock picker, but a new analysis of his charitable fund—a personal stock portfolio he co-manages that the financial website he founded has built a subscription service upon—shows he doesn’t beat the market. Cramer’s Action Alerts Plus portfolio has underperformed the S&P 500 index in terms of total cumulative returns since its 2001 inception, according to a working paper by Jonathan Hartley and Matthew Olson, researchers from the Wharton School at the University of Pennsylvania."
As I often do, I located the working paper by the researchers at the Wharton School and read the 19 pages. Their findings were as described as much and from their paper: "We find that Cramer’s AAP has underperformed the S&P 500 total return index and a basket of S&P 500 stocks that does not reinvest dividends both since inception of the portfolio and since the inception of Mad Money. In addition, Cramer’s portfolio has a lower Sharpe ratio than both benchmarks over the same time period."
"We also find over the portfolio’s entire history that Cramer’s AAP portfolio exposures are primarily driven by underlevered exposure to market returns (MKT-Rf) in every specification, which has heavily contributed to underperforming the S&P 500 in post-financial crisis years. In other specifications, we find evidence of a tilt toward small cap stocks, growth stocks, and stocks with low quality of earnings. Also, when controlling for various factors in various specifications, the negative alpha (intercept) from the regression no longer becomes statistically significant."
In less academic terminology, he underperforms with his stock picks.
This post was originally going to be about the ten things that Cramer taught me in the two books of his that I bought and read, Jim Cramer's Real Money and Jim Cramer's Mad Money.
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| This post was originally going to be about what I learned from these two Cramer books. |
Despite me bashing his stock picking through my own personal experience of losing money on his strong buy recommendations, and the literature that you could read all day about how his picks are not great, I like the guy.
He is, after all, a very wealthy and successful business man and investor and TV host, while I blog to an audience that I can count on my and my wife's fingers and toes.
I just know better than to take any stock advice ever again from this Money Madman, and I hope that you heed my advice. Put your money in an index fund without a manager, like the Vanguard S&P 500 index. It is not as exciting as picking individual stocks, but if you buy what Cramer advises to, you will wish that you did.
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