If You Want to Play the Game, You Better Know the Rules

Jim Cramer recently made news when he solemnly pronounced that anyone who may need a significant portion of their invested funds in the next five years should pull them out of the markets.

Investors who followed his advice missed the 11% increase in the markets this past week. So, was Cramer wrong?

Actually, he was right for all the wrong reasons, which brings me to this important rule:

Don't rely on Jim Cramer for investing advice.

If you have a time horizon of 5 years or less, you should not be exposed to any stock market risk. This advice has nothing to do with the present state of the markets, but rather with the historical volatility of stocks.

Stocks are very volatile over short periods of time. If you need the money when they are down, you will be forced to sell at a loss.

Over the past 50 years, an all stock portfolio was down almost 20% of the 589 rolling year periods. But if you held for a minimum five year period, you would have had losses only 2.4% of the time. Over any ten year rolling period, you would never have had a loss.

Cramer is a stock picker and a market timer. His lack of skill in these areas is well documented. His recent bailout advice to his hapless viewers was premised on his market timing skills. Apparently, he felt that the markets were going to continue to tank.

He was wrong. Again.

Smart Investing has nothing to do with market timing and stock picking. It is premised on an understanding of the relationship between risk and return. The risk of owning stocks is too great over the short term. This is true in both bull and bear markets.

Investors who anticipate needing 20% or more of their money within five years should confine their investments to FDIC insured Certificates of Deposit or Treasury Bills.

Jim Cramer and other financial pundits may be worthy entertainment. They are good for ratings and their programs generate serious advertising revenue.

In times of extreme market volatility, investors are tempted to rely on their purported expertise. It is important to realize that their advice is flawed and conflicted.

John Kenneth Galbraith, the famed economist, said it best: "We have two classes of forecasters: Those who don't know--and those who don't know they don't know."

Boo-ya!

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

Comments

[AContrario]

2 rules to always win at a game:

1. if you don't play, you don't loose

2. Change the rules at your advantage

rule 2 works as long as the group of winners is smaller than the group of players and you keep them
misinformed and hopeful.

People should be free to gamble with their own money, as long as it's THEIR money.
(from my point of view Vegas is more honest and serious than Wall St, at least you know that your odds to win are small but it is your CHOICE to play) so the stock market is cool as long as it stays what it is, a gamble for those willing to play their own money, not of those who didn't ask to play.


The current business-model of Wall St is:

1. Not sustainable because it linked real economy to a virtual "economy"(= international gambling),there
are no real collateral to back the sums if all the bets are called at once.

2. Reckless because no one is really accountable except the taxpayers who,no matter what, will foot
the bill

3.Destrcutive because family lives are destroyed or negatively affected by every "bubble bursts" and
I am not talking about financial workers who can't bear the idea of scaling down their lifestyles or
social aspirations but people who just try to keep their heads above the water.

Not everyone can win at this game.

[Troubledwawa]

LOL -

Cramer is telling people to pull out and sit on the side line, and Warren Buffet is telling people it's time to get greedy.

I guess it's all up to who the individual would listen to.

[dadw5boys]

Get out was smart the 11 % run up was a suckers run only lasted 1 day.

Getting greedy means buying quality cheap no cheap for cheaps sake.

[darthdarcy]

Here's the rule never invest in Wall St., never trust a broker, never risk your money on anything, buy real property, and never vote Republican...!

[proreality]

Volatility+Market Manipulation(Presidents working group on Financial Markets+injections of Federal Reserve liquidity laundered through the treasury for welfare for wall-street plan)+Insider trading(lack of oversight and regulation+rampant fraud)=MASSIVE PROFITS FOR THE 1%'s

These people are going to speculate and manipulate markets till they leave the American people destitute, and then offer up all the wealth they stole from us the people to start again... for a fee.

[SisterAnn]

I have came to the same conclusion. The market goes up until there are quite a few bought into it, then drops 4% in one day. They may be trying to get enough money to pay off the 524 trillion in derivatives.

There is no way I am going into it again until there is a lot more transparency and regulations.

[kells1001]

I think Cramer predicted the bottom around 7800 which hasn't happened thus far. Cramer's show is fun to watch compared to other stock pick news shows which is why he has a great following among younger investors. Personally I think its safe to say that most if not all guru's are just as guilty as Cramer--I'm not sure if Larry Kudlow has admitted we're in a recession yet?

[DuganS1]

The author apparently doesn't realize that Cramer told his viewers to get out of the market (if they'll need their money within 5 years) at a point when the S&P was higher than it is now- which at this point would still have saved viewers money. He's told viewers since that time that they could put money back to work in some stocks he's mentioned on his show. About the overall idea about market timing, you absolutely have to be a market timer to a large degree. Buy and hold investing has been a terrible strategy over the last several decades relative to market timing. There are a large number of stocks that are lower now then they were in 2000 and even 1997-8. It is absolutely vital to sell stocks that go down past key technical levels on high volume, otherwise they will be potentially exposed to significant losses. About the Barron's article about Cramer - I'm not a Cramer fan by any means, but to make the point - it was flawed in many ways. At least Cramer is usually bullish on the hot sectors, which include the stocks that go up the most, and bearish on the weakest sectors. Barron's on the other hand can be hot or cold on a hodge podge of stocks with seemingly no rhyme or reason. I still read Barron's every week but it is without any doubt in mind a worse stock picker than Cramer.

[Chubbster]

Markets are always made of mutually exclusive beliefs about reality. There will never be anything but conflicting advice and opinions. That is how they work. When everyone believes the same thing that guarantees it's about to change. Take this bear market: it is not going to stop going down until significant bad news comes out and the market responds by heading higher.

[KillTheMessenger]

Well said. Now everybody go back to their online trading tools. It's time to lose that last shirt, too!