Cramer Sees the Light (But Misses the Point)

CONCORD, NC - MAY 23:  Television personality Jim Cramer interviews NASCAR drivers during the taping of NBC's 'The American D
CONCORD, NC - MAY 23: Television personality Jim Cramer interviews NASCAR drivers during the taping of NBC's 'The American Dream' on May 23, 2008 at Lowe's Motor Speedway in Concord, North Carolina. (Photo by Rusty Jarrett/Getty Images)

I am no fan of Jim Cramer. I don't find him entertaining, although I can understand why many people do. My gripe is that his antics harm investors by making it appear his opinion on the direction of the market, or his stock-picking skill, adds value. It doesn't. There is no evidence that his track record is better than what you could expect from random chance. In a scathing blog, Henry Blodget stated: "It would be impossible to write a 'Bad Advice' column about investing without discussing Jim Cramer." David Swensen, financial author and Chief Investment Officer of Yale University, opined that Cramer "exemplifies everything that's wrong with the advice -- and I put advice in quotation marks -- that is given to individual investors." According to a 2009 study by Barron's, "[C]ramer's recommendations underperform the market by most measures."

I was pleasantly surprised to read a blog by Bruno J. Navarro at CNBC summarizing an interview he did with Cramer about 401(k) plans. Cramer is quoted as opining that most 401(k) plans "stink" because of high fees and lousy returns. He notes the entire system feels like it was set up to "... benefit the financial services industry, not you." With typical bluster, he states that "almost nobody else" expresses these views.

He is mostly correct. The 401(k) system in this country is a disgrace. It is rife with conflicts of interest, high costs and terrible investment choices. The primary beneficiaries are the mutual fund industry and the brokers and insurance companies who "advise" plan sponsors.

He is wrong that only he has this insight. I set forth similar views in my book, The Smartest 401(k) Book You'll Ever Read, published in July, 2010. Cramer's nemesis, Vanguard Group founder John Bogle, recently observed that the 401(k) system is "profoundly flawed."

Here's the point Cramer misses entirely. The core problem with 401(k) plans -- as Cramer noted -- is terrible investment choices. Most plans offer primarily high management fees, actively managed funds, where the fund manager attempts to beat a designated benchmark. These funds are likely to underperform low-cost index funds over the long term, reducing the returns of plan participants. Since brokers and insurance companies can incrementally increase their fees by offering the more expensive funds, they often minimize or eliminate index funds from the investment options.

Active fund managers tend to underperform because they engage in stock picking, notwithstanding the numerous academic studies demonstrating that attempting to find mispriced stocks does not work.

What advice does Cramer's Mad Money show dispense? Stock picking advice. Recently, he selected stocks he believes will benefit from a deal to avoid the fiscal cliff. This is the same activity engaged in by managers of actively managed funds in an often unsuccessful effort to "beat the markets."

The logic underlying Cramer's sage advice concerning the indefensible state of the 401(k) plan industry, applies with equal or greater force to his musings about stock selection. I applaud Cramer for taking on the 401(k) industry. Now he should do investors a huge favor by either dispensing academically-based advice about the perils of market timing, stock picking and fund manager selection or go off the air. Either option would be of immense benefit to investors.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.