April 19, 2011
The Folly of Active Management and TV Gurus
Last year I wrote an article about where to invest in 2010 and took that opportunity to remind investors not to fall into the excitement of active management and stock trading. Instead I cautioned them to focus on what you can control, like investment cost, risk, and asset allocation and to ignore the rest. So did I steer readers in the right direction? I was most confident that I had, but figured I would do some research on how one of the loudest stock trading icons had fared over the past year.
As the host of his show Mad Money, Jim Cramer is constantly on CNBC giving investment advice to listeners. In December of 2009, he stated that 2010 was the year of active investing and in particular certain sectors had a clear advantage. After the turmoil in 2008, he saw the financial industry as a definite opportunity in 2010 and named off several companies to buy. Not to my surprise, half of the stocks rose in value over the year while the other half showed negative year-end returns.
Furthermore, Cramer saw an opportunity in the energy sector, specifically in the recovery of natural gas versus oil. Here he listed over a dozen companies to invest in, with one of his favorites being a company that makes engines that run on natural gas and other alternative energies. The total return of these stocks for the year was 11.72%, and that is before you take into consideration trading costs. An investor in the small-cap index, Russell 2000, saw a 26.9% rate of return while taking on considerably less individual company risk.
Yet maybe 2010 was just a bad year for Cramer. I mean he does have a show on national television so he must know what he is doing, right? Since 2000, an objective research team from Massachusetts has tracked Cramer’s stock predictions to see how he has done. What they found was that over those ten years only 47% of the time had Cramer beaten the benchmark return through his stock picking! After watching his show, that seems like a lot of wasted energy to only beat benchmark returns at a rate less than that of a simple coin toss.
There is one takeaway from Cramer’s show that I do think all investors should listen to. On more than one occasion, Cramer reminds listeners that “no one will ever care more for your money than you do” and there is so much truth in that statement. Television ratings are the main goal of Cramer’s Mad Money series, and most investors have very different goals when it comes to their retirement accounts. A trusted advisor will put your interests first, and by doing so, you will have a much higher likelihood of achieving a successful retirement!