Jim Cramer and Investing in Index Funds

If you have a subscription at RealMoney, you should read these articles:

Jim Cramer and Investing in Index Funds

Using Investment Advice, Part 1
Using Investment Advice, Part 2
Using Investment Advice, Part 3
Tread Warily on Media Stock Tips

I didn’t say it at the time, but I wrote those with Cramer in mind.  This was not that I did not like Cramer, hey, he gave me my start in investment writing, my blog would not exist without that start, but that what he said in the mass media often did not include enough data to allow an investor to manage his/her portfolio.  I will explain why here.  (Note, this is true of many investment gurus, not just Cramer.  Cramer takes more abuse because he is so visible.)

Part one is understanding yourself.  What are you good at? What do you understand?  What do you have time to do?

If your work is demanding, ignore services that require quick responses in order to work.  If you don’t understand bonds or commodities, you probably should avoid advice on those, unless they update you regularly on prior recommendations, and provide a track record on recommendations. When younger people ask me about investing, the first question I ask is how much time they have to put into it.  If they don’t have time for it, I push them toward Vanguard and indexing.  Save time, get a slightly better-than average result.

It is also not wise to follow any sort of instructions on investing that you do not understand.  If you want the wisdom of the investor, ask to have a portfolio that mirrors his — I mean, if you have implicit trust in someone, make sure that your interests are aligned.  After all, that is how it is from my clients, they have copies of my portfolios and get the same results, less fees.

If you follow instructions that you do not understand, it is as if you believe in magic.  You are flying blind, but won’t admit it.

Let’s take a different tack: when you read or hear investment advice, how often do they tell you when to take the opposite action?  I.e., buy here, sell there.  Sell here, buy there.  That is rare.

And this is a reason why I rarely write about individual stocks.  I’m not going to update you, and that is true of most investment writers.  Also, when you get one right, you get one praise.  If you get one wrong, you get fifteen kicks.

Using investment advice boils down to understanding what one is intelligently capable of acting on.  You are responsible for educating yourself so that you are capable of evaluating investment advice.  If you don’t do it, no one else will, and you will only have yourself to blame.

More in part II

By David Merkel, CFA of Aleph Blog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.