Updated on 05.06.07

Deconstructing Jim Cramer

Trent Hamm

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.

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.

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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  1. Trent, I want to thank you for an excellent analysis of Jim Cramer. I have read a lot of article discrediting his stock picks and his style… They seem to (unlike you) miss a lot of the point when it comes to analyzing Cramer.

    I think it is important to highlight the point that you made in your post that Cramer does not just slam the bull and bear button and expect you to blindly follow the picks. Cramer never paints himself as a know-it-all. He’s an entertainer that people can learn a lot from if they pay attention. He preaches fundamentals in a fun way.

    Most of his critics choose to criticize his stock picks and comparing them to a monkey’s random picks. Sure, his picks might not be magical, but isn’t that the point he makes himself? You can’t just pick stocks and make money consistently. There will be ups and downs but if you pick fundamentally good companies and do your research and homework, you just MAY come out ahead more than you come out behind.

    Great post Trent.

    -William Wallets
    A Financial Revolution

  2. So would you recommend the book “Confessions of a Street Addict”?


  3. CF25 says:

    I recommend that everyone watch Cramer’s show, then note his stock picks, and then go to the charts and watch them get pumped up.
    Usually by the time you decide to heed his advice, the stock is already fluffed and you’re buying at a high.

  4. frzee says:

    What about that video of him admitting to manipulating stocks behind the scenes? The one that was yanked from YouTube after itulip.com found it and posted it? He is an entertainer indeed, but the dangerous kind.

    This is an impressive blog. But I wonder how someone who has come to so many of the same conclusions I have about money and — more importantly, life — can be so taken with Ayn Rand and Jim Cramer. Do some more research on how they actually lived their lives and I think they’ll end up in your Kiyosaki file.

  5. Dimitri says:

    I like Jim and I follow the same kind of strategy in picking my stocks and done very well with it. Thanks for the overview, Trent.

  6. Jack says:

    Jim Cramer is one of the most dangerous and irresponsible financial influences on television. He has no accountability and makes reckless calls severely financially injuring those who are naive enough to believe. I will be very happy to see him leave the public eye, hopefully soon.

  7. JustinJamm says:

    My goodness, what a spread of input form only seven people so far!

    Trent, I believe you have hit the nail square on the head with Cramer. I love his work. His goal is to TRAIN AND EQUIP his viewers, rather than making them dependent on his every word.

    William, also, thank you. I couldn’t agree more.

    CF25, I must insist that you miss the point of Cramer’s show entirely. The point is never, ever to “watch for stock picks.” The point is to learn the principles behind the stocks Cramer is “covering,” and then go apply the principles. It might be for those particular stocks, or it might not. If one of his “picks” goes up too much, then yes, it’s no longer a good investment — so you wait until the temporary craze subsides, THEN buy it. Unless…the whole reason you were watching was to TRADE the market instead of investing. And trading is secondary in his show; investing is primary.

    Frzee: Cramer’s stock manipulations, however they worked and whenever they happened, were at his hedge fund, and they are part of the built-in deceptive magic show that is Wall Street. You see someone else buying a stock, and you think, “Oh no! It’s about to be popular! I’d better buy some NOW before it’s too late!” Well, guess what? BING! You just got taken, because you don’t know what you’re doing and you’re a sheep. Hedge fund managers ALL know how to do this. And frankly, I don’t care whether he did it or not. I care about the essence and quality of the EDUCATION Cramer provides people with NOW to take care of themselves so that they don’t continue to need him over time.

    The main problem is people’s lack of education. Personally, I try not to let myself make these mistakes. If I see a stock going up quickly, I let it go, thinking, “either it’s too late, or it’s manipulated, or it’s up irrationally.” My emotions all scream, “Buy now! Buy now before it’s too late!” But I let it go, and I’ll either buy it later or not at all. Fear should have no hold, and it’ll get you slaughtered.

    Dimitri: good work. Keep doing your own homework and don’t let the Jim-haters get to you.

    Jack: You have no idea what you’re saying. If people just blindly invest based in Cramer’s offhand advice, then they are actually DISREGARDING his advice, because he ALWAYS tells people to DO THEIR OWN HOMEWORK and not just go off what he says.

    As for myself, I have absorbed most of his principles and designed a 10-12 stock portfolio that is consistently mirroring or beating the S&P 500 — and on top of that will be highly resistant to another crash OR to a longer current recession, based on what’s in it. And I give credit to him not for my individual stock picks, but for the education he has given me that has ENABLED me to do my own thinking.

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