Jim Cramer Is Seeing Red

Jim Cramer is at it again. He has peered into his crystal ball (which is apparently never cloudy) and he sees China in your future. He is quoted as saying "I'd go with China in 2013." Cramer wants you to act promptly on his recommendation before the news of China "driving global growth" is "all priced in." He recommends a long position in iShares FTSE China 25 Index Fund (FXI), an ETF made up of Chinese stocks.

Should you follow Cramer's recommendation? Before you jump in, here are some facts to consider.

As I indicated in a previous post, your assessment of the prospects for Chinese stocks is as likely to be correct as Cramer's. His "hit" percentage is almost exactly what you would expect from random chance. Picking the country where stocks are likely to outperform is akin to gambling. Did Cramer pick Turkey in late 2011 as the top performing country in 2012? Why do you believe his predictive powers are more accurate this year?

Cramer's advice to buy Chinese stocks now before his insight about driving global growth is "all priced in" is particularly foolish and misleading. Information about the prospects for China (and all other countries) is well known by the millions of investors in the global marketplace. It has already been widely reported in the financial press. The current price of stocks in China and elsewhere incorporates all of this information. As such, Chinese stocks are priced fairly today. They may go up or down in the future, but it's tomorrow's news that will drive those prices, and not information that's already in the public domain.

If Chinese stocks end 2013 with a significant increase, Cramer will tout his stock picking expertise. If they don't, he will move on to the next prediction. There's no accountability for bad calls. Eric Tyson, a best-selling personal finance author, wrote an excellent blog post on the perils of following Cramer's advice. He noted Cramer's advice on financial stocks (where you might think he has special expertise) has been terribly wrong. Most notable was his recommendation to buy Lehman Brothers on Sept. 5, 2008. The stock was trading at $16 a share. Cramer called it "a screaming buy" and opined that things couldn't deteriorate further. After bankruptcy, Lehman sold for pennies per share.

Tyson's advice should be posted on your wall as a daily reminder to ignore stock predictions: "... buyer beware of prognosticators claiming market beating returns who have no proof of their supposed superior performance."

I also see red, but for a different reason. I know that many investors will believe Cramer's views have value and will act on them.

2013-01-02-solin_book 7 Steps to Save Your Financial Life Now is available on Amazon, B&N, and iTunes. Dan Solin is the director of investor advocacy for The BAM ALLIANCE and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information, and content on this blog is for information purposes only and should not be construed as an offer of advisory services.