I've hugely enjoyed watching Jon Stewart roast CNBC in general, and Jim Cramer in particular, over the Comedy Central humor fire.
Cramer is entertaining on his frenetic "Mad Money" show. But his investing philosophy -- individual stock-picking and market timing -- is a proven loser. Why anyone follows his bad advice is a mystery to me.
Hopefully The Daily Show's expose of Cramer's cluelessness will lead fans of Mad Money to look elsewhere for sound investment advice.
On the first of Jon Stewart's rants he shows Cramer saying in 2007 that Bank of America "was going to 60 in a heartbeat." Today it's around 5, yet guess what? Cramer is still saying Buy! to B of A (sure sounds like it...watch very end of video on that link).
Here's one of Stewart's better lines.
Maybe the most shocking Jim Cramer gem is when he is advising that his audience buy stocks: "You should be buying these, and accept that they are overvalued, but accept that they are going to keep going higher. I know that sounds irresponsible but that's how you make the money." On that day in 2007, the Dow was at 13,930. It is now below 7,000.
"If I had only followed CNBC's advice," Stewart says at one point, "I'd have a million dollars today. Provided I started with a 100 million dollars."
Smart investors realize that what Cramer and CNBC are peddling is pure bullshit. Plenty of sound research has proven that index (or passive) investing leads to superior returns.
Sure, a few people manage to beat the market. And a few people also win big bucks in lotteries.
But just as it'd be crazy to follow the advice of a lucky Megabucks winner ("I chose the numbers in my children's birthdates"), so is it foolish to forget that some always will pick stock market winners, or forecast economic trends, purely by chance.
In the long run, they'll almost certainly do worse than if they'd tried to merely match the market through index investing. The Motley Fool has a 60 second way of convincing you of this.
For those who are deeply addicted to stock picking and market timing, there's a 12 Step Program for Active Investors. (Listen to the "musical interpretation" link...clever.)
I've been a fairly serious investor for about twenty-five years. For quite a while I was the type of guy who'd be a Cramer acolyte. I subscribed to investing newsletters, researched stocks, tried to devise foolproof investing schemes.
Until I realized that I was acting foolishly. And started reading about index investing.
Since 2002 we've had a big chunk of our investments in DFA (Dimensional Fund Advisors) index offerings. DFA is a pleasingly geeky outfit. Their approach is highly sophisticated, as you'll see if you take their philosophy tour -- which starts on this page.
I don't claim to understand all the economics jargon. But I do know that I sleep a lot more soundly now that I've given up trying to outsmart the market.
Currently I aim for about a 50-50 mix of equities and bonds. Back in 2002, when I got into index investing, it was 60-40. Here's a chart from Mint showing how we've done compared to the S&P 500 during the past year.
The green shows that we've been outperforming the overall stock market since the downturn began. No big surprise, since our 40-50% share of fixed income investments softens the financial meltdown pain.
As do our index funds (see this Vanguard video), partly since we're not forking out for large fees or transaction costs. The overall result is that we're down about 31% in the past year, while the S&P 500 is down about 47%.
That 16% difference means that we would have done about 50% worse without following a balanced asset allocation and index investing plan. This isn't rocket science -- just simple common sense.
Which is missing from CNBC and Jim Cramer.
They try to sucker viewers into believing that the talking heads on their cable channel can predict what's going to happen with both individual stocks and the overall market.
Warren Buffet says, in less than a minute, that index funds are the best investment for most people. Is Jim Cramer a better investor than Buffet? No way.