Deconstructing Jim Cramer

This week, The Simple Dollar is deconstructing five top personal finance and investing pundits and asking the big questions about their track record and their message.

Jim Cramer in redSince I also happen to be reviewing Jim’s book Real Money this week, I thought I would start off the week by focusing on an individual that I would describe as the most well-known stock picker in the United States today, Jim Cramer.

Background
Jim Cramer is literally what he presents himself to be: a former professional hedge fund manager and individual stock investor. He worked for Goldman Sachs for three years in the 1980s, then started his own hedge fund (Cramer Berkowitz) in 1987, running it until 2000 when he retired, mostly to begin focusing on his professional media career, which revolves around his television show Mad Money (on CNBC) and also on his website thestreet.com. He claims some stupendous returns for his hedge fund and there is evidence that it performed well, but as a private hedge fund it was never subjected to a public audit.

Message
Jim Cramer’s message to individual investors can be boiled down to just seven words: buy and homework, not buy and sell. Cramer strongly focuses on the need for doing your homework on any investment, but especially on individual stocks: if you can’t invest an hour a week studying an individual stock, you should be investing that money elsewhere. However, if you invest that time and do your stock picking with a level, cool head, you can beat the market.

Cramer also is a big, big fan of diversification. If you’re investing in individual stocks, you should hold at least five of them and they should be in very different industries. In fact, this was one of the largest themes of his radio show, when he would have individuals call in and list their top five holdings and he would often rip them to shreds when they weren’t well diversified.

Another notable aspect of Cramer’s message is that he believes strongly in investing conservatively for retirement. Your individual stock investing should come from money that you can afford to lose, and your retirement money is too important to use in individual speculation.

My Take
I used to think of Cramer as a complete buffoon. I would catch Mad Money on occasion and cringe as he ran around the studio throwing stuff, yelling, and hitting sound effect buttons. How could anyone possibly use anything this lunatic says as a basis for investing?

Then I had the chance to read Confessions of a Street Addict. For those of you following my ten books that changed my life series, you’ll find out that I love biographies as they often redraw a person for me, adding many brush strokes to a portrait, and often changing my understanding of the person, their life, and their impact on the greater world. When I read Confessions and followed it with a bit of fact-checking on my own (I can’t help it, I do this whenever I read a nonfiction work), I realized that Jim’s frenetic energy on the air wasn’t merely a gimmick, but the result of an incredibly deep lifelong passion for the stock market. He might up the ante a bit for television, but that underlying passion and fire is real.

I kept reading Jim Cramer’s work at thestreet.com and I kept being impressed. Not by the quality of the stock picks, but by the underlying fundamentals. He repeatedly hammers home the point that there is no get-rich-quick and there is no free lunch. Rather than claiming that his stock picks are great insider tips, he states exactly why he makes his calls by pointing at the fundamentals. But perhaps biggest of all, he encourages everyone to do the homework before putting up their money. As risky as individual stock investing is, many pundits act as if it’s easy and that it’s almost guaranteed money. Cramer doesn’t do that; he’s based in reality, and the fact that he uses this as a major part of his message makes me have more respect for Cramer than I do for most financial gurus.

The bottom line: Cramer’s antics are way over the top, but they are born out of passion. Look beyond them and you’ll find a passionate and driven individual who preaches some very strong fundamental ideas.

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