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The Solin-Cramer Smackdown: The Real Story
In case you missed it, Cramer and I went head-to-head during my appearance on CNBC's Power Lunch on Friday. You can see the video here.
I was asked what alternatives there were to investing in 401(k) plans. I replied that investors needed better education so they could make intelligent choices outside these plans. I then said "One of the things you could do is give us more 'In Bogle we Trust' and much less 'In Cramer we Trust'."
Cramer's unscripted, bug-eyed rant followed.
His point was that Bogle's advice has been wrong for the past decade: "In all due respect, the S&P is flat literally for ten years. That's John Bogle's world." He went on to compare "Bogle's world" to his world in which he claimed credit for advising investors when to get in and out of the markets.
The facts tell quite a different story.
As I noted after Cramer stormed off the set, either Cramer has no understanding of "Bogle's world" or he intentionally distorted Bogle's advice.
Bogle's views on investing are well documented.
He advocates determining your asset allocation and investing in a globally diversified portfolio of low cost index funds.
Cramer's assertion that Bogle suggests investors confine their investments to the S&P 500 is false. The S&P 500 does not represent an appropriate asset allocation for anyone. It is far from globally diversified. It is too risky for any individual investor. No one who knows anything about investing would suggest that investors confine their investments to an S&P 500 index fund.
Building on this distortion, Cramer asserts that the S&P 500 is "flat literally for ten years." Actually, it lost 26.5% for the ten years ending December 31, 2008.
How have followers of Bogle's actual advice fared during this period?
A moderate portfolio of 60% stocks and 40% bonds earned 36% for the ten years ending December 31, 2008.
Now that we have the results of the real "Bogle's world", let's look at Cramer's record.
Barron's conducted two studies of Cramer's stock picks.
In the first study dated August 20, 2007, Barron's concluded that "over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%."
Barron's revisited Cramer's stock picking skills in a second article dated February 9, 2009. Once again, Barron's concluded that Cramer's picks "underperform the markets by most measures."
Cramer also was selective about his market timing skills. As noted by Barron's, in the Spring of 2007, Cramer was the "chief cheerleader" for the bull market and "was giddily exhorting the Dow Jones Industrial average towards 15,000, with no troubles in sight." If he is going to take credit for his good calls, he should acknowledge the bad ones.
Investors have a choice. They can follow Bogle's advice and capture market returns, less low costs, with 100% certainty. Or they can be deluded into thinking that self-styled gurus like Cramer have the ability to beat the odds and pick stock winners.
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.
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The question remains, were the 401K investors given the option of fixed capital? It certainly will not make you rich, but all of this talk seems to beg the question of what options were individuals given when they signed up for their 401K. Sure they were told the ROI was better in the stock market, but I just don't get it. While investing for my retirement, I selected the tortise approach and did not loose a penny. Were all of these individuals given that option? Did they chose the "get rich quicker / faster approach?
I recently saw an ad on TV that showed people who went into retirement with large credit card debt. Really? Why would anyone retire while they are in debt ? Why not work another year and pay off the debt? What are these people thinking...don't they read investment information...that clearly states there is no guarantee?
If this is more than just an ad...then the statement that there is a sucker born every minute is an understatement. This should be a lesson learned...and passed on to the next generation.
If you watch Mad Money and invest based on his advice alone, you get exactly what you deserve. He is the Mad Man of Mad Money. It is surprising that he has been on as long as he has. I periodically watch his show for a short while, but the clownish act is suitable for the circus and wears thin really quickly. CNBC has enough problems without this yahoo making such a fool of himself and the network in general.
The video of him talking about short sales and manipulating the market are disgraceful and as he admited probably illegal except that the SEC didn't understand its own rules (probably true). With such overt corruptness is it any wonder why the financial system is in such a mess?
While Mr. Solin and some readers here have been quick to remark on Cramer's "unscripted bug-eyed rant", I wonder why no one took notice of Mr.Solin's insolent tone during that segemnt not only toward Mr. Cramer, but also toward the other invited guest who appeared opposite him. In my opinion Mr. Solin should have expected an unkindly response if not only for that, then for the inappropriateness of suggesting that cnbc's best-known commentator be replaced in part by a regularly invited guest, on of all days, the otherwise celebratory broadcast of cnbc's 20th aniversary. And all this done to justify what amounts to a 3% annual return for the past ten years. That to me seems very little for anyone to be crowing about, "low costs" or not. Thank you for the opportunity to express my view.
In 1999, Cramer also said that after a lifetime of picking stocks he was becoming more of a believer in the Bogle method. His show is entertainment and nothing more, and I'm sure he knows that and fully accepts it. Solely investing in his suggested stock picks is a losing exercise. But, to ambush a guest with what must have been a willful distortion of facts about Bogle's advice (which has nothing to do with indexing against the S&P500) and then to leave before waiting for a response is just cowardly (perhaps still hasn't gotten over his encounter with Jon Stewart). He must have known that he would lose the argument, so only choice was to ambush and run.
I wish that ridiculous rant segment on CNBC had been as clear as this blog.
I understood Cramer was crapping all over Bogle's theory, but this blooger did not adequately defend it or clearly state the weak performance of Cramer's.
Now the data is stated and it should be yet another nail in Cramer's coffing. No wonder he stormed off the set. Couldn't stick around for the bad news.
"Cramer is a former hedge fund manager and founder/owner and Senior Partner of Cramer Berkowitz, where Jim reported a compounded "rate of return of 24% after all fees for 15 years" at Cramer Berkowitz. He retired from his hedge fund in 2001, where he finished with a self reported 36% return in 2001."
I guarantee you that Solin's investment strategy can't hold a candle to Cramer's at his hedge fund.
Cramer was a Wall Street cheat. He did actually reveal his "techniques" on a recently noted video.
However he made his fortune NONE of it is applicable to his "dittoheads" if he's got them.
He's been an insider and that's what an "investro" (read: player) has to be. Outsiders who make decent gains can see it all wiped out in a nano-second. But they are hooked and defend their enabler...
The tragic part was Cramer was so darn convincing, even the kids loved him. The Pied Piper of Hamlin, took away 401 Ks. We're an easy mark for smooth, slick , seemingly inteligent, advisors. Even if everything was on the up and up, caution should have been the order of the day. Wall St. gambling was fun, but the reality is, its all a game, and the house always wins. Banks are the same, its a sad time for fairness. The imformation society, should have imformed itself of the impending losses of our beautiful America. We allowed Reagon economics, to tear apart our industrial nation. Thirty years ago this all started in California, when the rich no longer wanted to pay taxes. Ronnie was their man, built to bankrupt a nation.
And then there were people who when all the signs were out there said the economy could not collapse and the stock market was going to stay firm (when it was at about 12000 in about June).
So if people had watched the big trends, and had gotten out when so many signs were there, all the numbers you posted are worthless.
In fact, how would have someone done if they had invested in low risk bond fund compared to S&P index funds in that 10 or so year period. Be honest with dates and inflation.
You gave Cramer a dose of reality. Not some thing he deals in.
He has called the ups and downs of the market wrong for 2 years.
http://www.willthomas.net/Chemtrails/Image_Library/index_3.htm
401K Plans were never intended to replace pensions or Social Security. All we did in the 1980s was hand over our hard-earned money for Wall Street to play with, just like Las Vegas...the odds are not with the long-term investor. 401Ks should supplement a pension, social security, and your own personal assets...homes, personal savings. Business and Wall Street salivated in 2000 when BushCo came into power and made it even a riskier ride and we are all paying the price now...companies no longer want to fund pensions and if the Pubies had had their way the last eight years, they would have forced us into a partial investment 401K plan with Social Security. It was unchecked greed, promoted by the billionaires/millionaires who were created by this mess. Now we will pay the price once the boomers retire and you have a huge glut of folks who WILL NOT have enough savings or money to live out their lives. It is going to get very ugly. I hope the young people of this country recongnize what is coming and start standing up for their economic security. You can't start out and work for the next 30 -45 years on one set of rules and then change them for a generation at the time they need their money to retire. It hurts everyone personally and it weakens this country and her economy.
Dan, I saw the segment, nice job. Your comments were right on. Cramer took the bait, which is unfortunate for the audience, but CNBC seems to make it their job to confuse rather than enlighten, especially with their tendency to talk over their guests. I agree that for 99% of investers, they should be in Index fund, properly diversified across a range of asset classes. The lady who was on with you was so wrong. Unless matching funds are available, as you well know, many 401K's just steal your money in fees, they are evil in most senses of the word. You can get tax advantages in an IRA for heaven's sake.
However, I don't believe that what Buffet and others have achieved is pure luck. If we talk about the recent crash, I DCA'd OUT of my equities during the course of the crash... lost 12.7%. I'm an aggressive investor, typically 90% or more equities, so why did I act? There was a lot of information available out before the crash that rather directly indicated a financial crisis ahead. It would have been foolish to ride it out. Am DCAing my way back into stocks... don't care if I don't time it right; I'm way ahead of my benchmark. It would behoove the buy and hold community to acknowledge that they don't have a monopoly on investment wisdom. Noting that 99% of investors will come out ahead with buy and hold is good enough.
Cramer is nothing more than a modern day CARNIVAL BARKER.
He talks a lot but says nothing.......and then claims credit for things he didnt say and evades responsibility for the things he really did say.
These verbal tricks are now used by........
Wall Street,Bankers,Politicians,Businessmen,Presidents,Congressmen,Regulators and everyone else in positions of power in our country. Doubletalk is the norm from these people.
The biggest Carnival Barker............Barack Obama
Maybe you could tell people to stop giving their money to rich people. Investing is, in fact, giving your money away to rich people in the hopes that they'll give you back something for doing absolutely nothing. That, my friends is pure, unadulterated greed. Jesus HATES greedy people.
This is gambling folks. You ALWAYS loose. The house ALWAYS wins.
Tell the truth and they'll think it's hell.
Love it.
That's such a great quote, it deserves to be sourced for those who don't know the source - President Harry Truman, who looks better and better as time goes by.
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From Wikipedia:
Whilst in Harrisburg, Illinois, Truman delivered a speech attacking the Republicans. During the speech a supporter yelled out "Give 'em Hell, Harry!". Truman replied, "I don't give them Hell. I just tell the truth about them and they think it's Hell." Subsequently, "Give 'em Hell, Harry!" became a lifetime slogan for Truman supporters.
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It's time, and past time, to "give 'em hell" to a whole lot of bullshitters, in business, politics, the media.
That's why the Gods delivered the internets into our promethian hands.
Also, "Don't just do something, stand there."
It's Googlicious.
I'm a stockbroker...cancer sidelined me for the meltdown....out of "commission" for 6 months..and yes...that disease changed me...I can't do this anymore..NOT for commission...sadly...I'm probably unhireable...uninsurable.... and open to suggestions as to what tihs 54 year old can be when she grows up...that does NOT involve commission....
I'm in the same boat as you, only its ESRD for me.
I recommend you actually learn to trade the markets for yourself, and forget about trying to make money by telling other people what to do (especially when you don't know what you're talking about).
If you're interested in that path, the best educator I know is a guy named Robert L. Miner. He's been teaching and trading successfully for 20 years. Start by looking him up on amazon, and read the outstanding reviews of his two books. Then you can go to his website dynamictrading.com, and become a student of his, if you wish.
Good luck.
The analysis by Barron's was very badly flawed. First, when Cramer recommends a stock, that doesn't mean that investors should buy it at that moment. Often times Cramer recommends a stock that's in an uptrend and is merely confirming that it's a good stock to invest in. Often times Cramer assumes that investors are in the stock already and even suggests that investors should wait for a pullback to get in. Second, Barron's makes an assumption that investors will never sell stocks recommended or backed by Cramer. That is false. Cramer touts a buy and homework strategy that means that investors should sell when the fundamentals change. Cramer also assumes that many of his viewers are traders and will sell on negative technical signals. Overall, I can't imagine that Solin thinks a buy and hold strategy, even Bogle's strategy, has been more successful than trading over the past 10 years. In this 10 year time period there has never been another time before when traders have faired so much better than buy and hold investors. The reason is that traders sell. Traders either missed most the downside of the market collapse in the past year or hedged it with shorts or puts. Traders also know where to put their money in market turnarounds - which is almost certainly not the defensive stocks that Bogle holds that always underperform (dramatically unperform) in bear market rallies or the beginning of bull markets.
You defend Cramer with a lot of caveats...when he recommends a stock, doesn't mean buy it now, assumes you already own stocks, means for you to wait for pullbacks, etc. I thought that you were about to also suggest that when he advises to buy a stock, he actually means to sell it, depending on where the stock trades next. You also seem to be confusing "trading" and "investing". As a trader, you can make a lot of money taking advantage of intraday price inconsistencies or product spreading, using tools like short selling or put and call options. Even then, the failed or marginally successful traders far outnumber the big players (many of whom, evidently, also got whacked over the last year as traders for hedge funds). Investing, in which 99.9% of public are involved, relies on buying mutual funds and is a longer-term excersice, not an intraday one. You can't possibly suggest that the public is better off stock-picking and market timing over a passively-managed diversified portfolio of index funds. The data overwhelming support the latter, especially when the respective fee structures are taken into account and investing time horizons increase. Over the longer term, at least a 5-10yr horizon, nearly 99% of actively managed mutual funds fail to beat their respective benchmarks (actively traded funds, which by the way, are managed by non-other than institutional "traders").
The data does not support long term investing over trading if you include the 2000-2003 and 2008-current bear markets. That's because traders sell, while long term investors do not. Hedge funds over the past year by the way have dramatically outperformed mutual funds. Nearly every hedge fund over the past year has been heavily short financials (including Reits) and mutual funds have been on the losing side of that trade. Most hedge funds have even been in cash for the most part from last September until recently, while mutual funds have taken all the downside. As for trading "taking advantage of intraday price inconsistencies and product spreading", that is only a very small part of the puzzle. The most important issue here is that traders sell. Traders did not ride out the 1400 to 666 S&P slide like mutual fund managers did and index funds had to (because they ARE the index). Traders also ride the top performing stocks in top performing sectors (which had been the cyclicals from mid-2003 to mid-2008), while mutual fund managers sat largely on defensive stocks that underperformed dramatically. Just look at Buffet, he held JNJ, PG, and KO for the last 10 years and they didn't move at all. Traders on the other hand were riding industrials and basic materials and were taking huge gains.
Exactly, and not to mention:
"...over the past 10 years."
Over the past ten years stocks have been riding a speculative bubble- all boats rising, essentially. As soon as the bubble burst (and this one was SO much worse than the tech-bubble ten years ago), the VAST majority of individual stock pickers and day traders were hit MUCH harder than ordinary investors with long-term, diversified portfolios, just as those who diversify and buy indexes will avoid more pitfalls when the market gradually recovers.
I think a lot of relatively young people who grew accustomed to day-trading in a bull market just can't conceive of why Solin, and Bogle, are right about this, even though the last year is all the evidence any rational person should need. Defending Cramer won't bring back the "glory days", it's just an attempt at wish fulfillment.
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