I am no fan of Jim Cramer. While I fully understand his persona is a carefully crafted schtick designed to entertain, his Mad Money program harms Main Street investors. His stock-picking recommendations are no more likely to be accurate than the flip of a coin.
The myth that Cramer has some special insight into the market leads some investors to rely on his predictive powers, often to their detriment. His focus on short-term information misleads investors into believing they must tune-in daily to get his latest "insights." This wrong-headed approach to investing obscures the irrefutable fact that investors who follow Cramer's rants are likely to significantly underperform broad market benchmarks over the long term.
I have no doubt that in his private life Cramer is a highly intelligent and thoughtful person. However, he views his own show as a farce, and has expressed shock that it is successful. In a May 2007 article he authored in New York Magazine, he stated: "God knows why, but there seems to be a market for this kind of idiocy."
He was correct in this observation. There has been an enduring market of gullible investors who fall for the kind of "idiocy" disseminated by Cramer and many other self-styled financial pundits.
Last week, Cramer found himself in the middle of another controversy. Cramer co-founded TheStreet Inc., a financial news company, in 1996. The market value of his company is a fraction of what it was worth during the dot-com bubble. He is the largest shareholder in this company. The second largest shareholder is a hedge fund, Cannell Capital LLC, run by J. Carlo Cannell.
In a colorful letter, which was quoted in a story on Bloomberg, Mr.Cannell complained that Cramer was spending too much time on CNBC and neglecting TheStreet. Cannell urged Cramer to "resign from CNBC and align your considerable energy and talents to helping your fellow shareholders crawl back from Hades."
There are some valuable lessons investors can learn from this shareholder dispute.
Cramer is dumb like a fox
Whether markets go up or down, the securities industry always wins. Typically, investors are left holding the bag. While Cramer considers himself an advocate for investors, his program is sponsored by the securities industry, and it's the prime beneficiary.
Information disseminated by Cramer's financial news company largely consists of the same flawed stock-picking recommendations that are featured on his television program. Although the company had a net loss of $3.8 million in 2013 and almost $13 million in 2012, Cramer is guaranteed compensation of at least $2.5 million a year in royalties, another $300,000 in licensing, and stock awards in addition to that.
What's the lesson?
Cramer is telling you the way to reach your retirement goals is to rely on his stock picks and his market timing advice. He makes his own money running a financial news site that disseminates this (mis)information.
The real way to make money
Apparently, one of the primary sources of Cramer's wealth came from the hedge fund he ran in the 1990s. Although, as one journalist noted, it's impossible to evaluate his performance without seeing year-by-year relative returns, risk profiles, standard deviation and other metrics.
Even without those details, one thing is abundantly clear: The path to untold riches lies in running a hedge fund with meaningful assets. In 2013, when most hedge funds generally lagged the stock market, the top 25 hedge fund managers earned an aggregate $21 billion.
See the pattern? Investors in the average hedge fund underperformed market indexes. Hedge fund managers profited handsomely. They win. You lose.
Do as Cramer does and not as he says
I suspect Cramer would blast the management of a public company that paid extravagant compensation to executives while posting significant losses, causing the stock to tank. He seems to have a double standard when he is the beneficiary of this conduct. Not only is he receiving extraordinary compensation, but he is devoting only a portion of his time to the company he co-founded.
I can picture Cramer interviewing himself and asking his alter ego to justify this conduct, accompanied by sound effects of roaring bears and snorting pigs. He would be merciless and spewing outrage.
It would be difficult to come up with a more glaring example of hypocrisy.
Here's the overriding lesson to be learned by the current controversy involving Cramer. It's possible to make money by emulating his conduct, but most likely not by following his stock-picking recommendations or listening to his market "insights."
Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read.
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 advisery services.