Monday, May 30, 2005

Trading With the Enemy

I spent this Memorial Day weekend in Seattle, as beautiful, livable and "feel good" city as I've ever been to and during the breaks from walking everywhere (did not remove the car from the hotel parking once, other then to leave), I read Trading With the Enemy by Nicholas W. Maier. This is a book written by a young member of Jim Cramer's Hedge Fund, Cramer & Company, that Cramer pumps so often on his TV appearances. The fund's returns were about double the returns of the S&P during the nineties, a fact Cramer wears as his badge of credibility whenever he appears on TV.

This book, if it is to be believed, describes how this out performance was acheived:

(1) Scalping frational points on huge lots of shares of mostly high-cap stocks;

(2) Advance non-public information from highly rewarded brokers of their firm's upgrades and downgrades on stocks;

(3) Sweet allocations of hot IPO's in an insanely hot IPO market, again, as payback for huge commissions paid to brokerage companies.

If all this is true, we now have an explanation as to why on an equal playing field, Cramer can't trade his way out of a paper bag. Remember, his $400 a year Action Alerts service is barely keeping up with the S&P averages. And his manic TV show, Mad Money, is so scattered and bi-polar in it's advice, stocks are loved or hated on what appears to be whims of host rather then traditonal security analysis.

The book also paints Cramer as a foul-mouth Napoleonic tyrant, throwing computer equipment across the room at his employees and blaming anyone except himself for any mistakes that are made in the trading wars. And there were plenty of mistakes made under his commmand.

So what?

So you probably watch this guy on CNBC, or listen to his radio show or come across some of his written articles in periodicals. Know that his limited success in the nineties came from flipping stocks in a few minutes or hours, seldom for days.

His buy and hold stock picks now need to be accompanied by this disclaimer:

What have I done for you lately?


Michael said...

Well said. It also kills me how Cramer touts techniques (e.g., aggressively averaging down) that most people would be nuts to do with their own money. I still wonder why his wife, the 'Trading Goddess' isn't the famous guru since she's the one that made all the good decisions early on. Go figure...

Anonymous said...

Yes I agree. Cramer does great damage to the public by the averaging down of securities, never using a stop loss, and injecting unnecessary emotion into every trade. Oh, and have I mentioned that he went to Harvard Law School and worked at Goldman Sachs? He is kind to remind me of the facts, about every 5 minutes or so.

Cramer is to Trading what the WWF is to Sports- nothing more than Financial Entertainment. It is so unfortunate that the audience treats this guy as a Guru.

I am entertained by Cramer. And I am absolutely amazed at the poor advice he gives. The lightning round should be renamed the losing round or better yet, the I need to get electro-shock therapy round. Boy, he could use a little more kVA.

He has some wonderful guests on the show, like Greenberg and Kass. They are right on the money for the most part.

The bottom line is that trading and to some extent, equity investing is for professionals. If you are not able to put in the time and effort, buy a mutual fund and be done with it.

Thanks for a great blog Allan.


the mtb investor said...

Visit Jim Cramer's Mad Money...


Anonymous said...

I remember hearing Cramer in March, 2003, saying on the radio, "get out of your stocks, this market is going much, much lower." We were at the very bottom. Two weeks later, when the market was much, much, higher, I heard Cramer say, " I sure am glad I got my listeners back into the market before this great move". What a liar.