A few weeks back the CNBC web site had a clip from Jim Cramer’s frenetic show Mad Money, titled: “Cramer: Filter out the noise!” Donning noise-cancelling headphones for dramatic effect, the animated market commentator counseled investors not to be scared off by certain negative headlines when evaluating stocks to buy.
When the noisiest voice in investing advises viewers to ignore the noise, is that hypocrisy or just irony?
Ignore more than headlines
Cramer has a reputation for sometimes going a little too far, but in this case I feel he doesn’t go nearly far enough. In the clip, he says ignore headlines that might dampen your enthusiasm for an appealing stock story. I say ignore headlines, but also ignore economic indicators, analyst ratings, historic price charts, and the can’t-miss advice of celebrity stock pickers like Jim Cramer.
He says dare to ignore information that runs counter to his picks and pets. I say dare to ignore everything he says too. Or better yet, turn off the TV and go for a run with the dog.
He says pick your stocks carefully, based on knowledge, not rumors. I say don’t try to pick stocks based on any noise that comes out of any electronic device of any kind. In fact, I say don’t pick individual stocks, period. I feel investors are much better served by building a diversified portfolio of index ETFs.
Don’t try to predict the unpredictable
A well-designed index ETF may contain hundreds or thousands of stocks or bonds. Containing so many different securities, its performance will capture the innate risk and return characteristics of the entire asset class, not just the unpredictable performance of one unpredictable stock.
Last week I discussed the perception that index investments purposely deliver mediocre mid-pack performance. Data tells a different story – by capturing asset class returns, indexes frequently outperform actively managed funds. In fact, in 2011, benchmark indexes across all equity types beat 84 percent of active funds.
Recognize entertainment when you see it
I give Cramer credit. He makes boring company analysis interesting and often dazzles with encyclopedic knowledge on blue chips stocks and unknown startups alike.
I certainly don’t embrace, condone, or encourage his trader mentality or his methodology, which is all about stock picking and market timing, but for enthusiasm he’s the undisputed champion. Hopefully his high-energy style leads more people to think about the importance of investing for their futures.
I suggest we all accept his show for what it is, real entertainment. Cramer attracts eyeballs to CNBC and its web site. He sells ads and gives the network a considerable burst of personality. That’s his job and he does it well.
If you watch, know that it’s entertainment, not disciplined investment advice. And be sure to filter out the noise.
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An investment cannot be made directly in an index.
Each of my 25+ years in the investment industry has reinforced one key idea it's impossible to predict the future, but essential to prepare for it.
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