Cramer's sane moment on Gross' exit

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htdrag11
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Cramer's sane moment on Gross' exit

Post by htdrag11 »

Not sure if it's the right forum, but I found Cramer's concluding remark rather apt for our group here:

"But if you're trying to build a retirement portfolio that uses diversification and asset allocation to lower volatility, it's far simpler and more sane to own bond index funds instead."

Here is the article; maybe a case of the Peter's Principle moving to manage a measly $13 million fund:

http://www.marketwatch.com/story/how-ji ... 2014-10-02
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Re: Cramer's sane moment on Gross' exit

Post by garlandwhizzer »

Now, if Cramer would just extend that same logic from bond investing to stock investing, i.e. moving from active management to index funds. That appears to be unlikely as it would put him out of a job.

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Re: Cramer's sane moment on Gross' exit

Post by htdrag11 »

That would put a lot of people in the financial services out of a job, probably causing another job bust and affecting consumer confidence.
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Re: Cramer's sane moment on Gross' exit

Post by rob »

He gets a bad name here - hey I still have him in a pool as most likely to die from an exploding head while on tv :D - but like a lot of us, I suspect his personal beliefs might differ from what he needs to do to earn a living. I don't own any products that my employer sells for reasons many here would already understand :shock:
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Re: Cramer's sane moment on Gross' exit

Post by Day9 »

I have heard him recommend stock index funds (for a young person's first $5,000 he invests).

I can't believe that people still believe his thesis that you can beat the market by doing "one hour of homework per week for every stock in your diversified 5-10 stock portfolio".
I'm just a fan of the person I got my user name from
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Re: Cramer's sane moment on Gross' exit

Post by nisiprius »

Cramer is interesting. This is a verbatim quote from his 2009 book, Getting Back to Even.
How many stocks does it take to be truly diversified? I have found that it takes a minimum of five to capture true diversification and protection from the undesirable elements…. [ten would be terrific but] if you insist on more than fifteen or more stocks, you might as well hand off your money to one of those mutual fund fellows, although the costs, in fees, will be prohibitive unless you select a passive model, such as an index fund.
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Re: Cramer's sane moment on Gross' exit

Post by shawcroft »

nisiprius wrote:
.......How many stocks does it take to be truly diversified? I have found that it takes a minimum of five to capture true diversification and protection from the undesirable elements…. [ten would be terrific but]
.....

Five "stocks" to capture true diversification .....and ten would be terrific.!!!

Really?? And people actually listen to Cramer for "investment guidance"

Madness.....

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Re: Cramer's sane moment on Gross' exit

Post by Cal Aggie »

I always laugh when I see Cramer's name in a post. It is an invitation for the Cramer-haters to come out of the woodwork, although many of these same people worship Warren Buffett -- another stock investor. Has anyone actually watched Cramer's show, or thought about the title? The show is entertaining and sometimes insightful (if you want to invest in individual stocks). I like index funds and I also like Cramer. If you don't like him, don't watch the show and ignore his advice and commentary.
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Re: Cramer's sane moment on Gross' exit

Post by Clearly_Irrational »

I used to watch his show and I've read several of his books. Much of his advice is actually pretty decent if you listen to it in context.
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Re: Cramer's sane moment on Gross' exit

Post by Johno »

Cal Aggie wrote:I always laugh when I see Cramer's name in a post. It is an invitation for the Cramer-haters to come out of the woodwork, although many of these same people worship Warren Buffett -- another stock investor. Has anyone actually watched Cramer's show, or thought about the title? The show is entertaining and sometimes insightful (if you want to invest in individual stocks). I like index funds and I also like Cramer. If you don't like him, don't watch the show and ignore his advice and commentary.
I don't much like Cramer or Buffett but I agree there's a double standard here about the two of them. Cramer is no Buffett of course, but who else is? Still the concept is basically the same. And last I checked CNBC isn't a pay channel so you don't actually have to pay for Cramer's advice any more than Buffett's sometimes it seems dispensed on that channel almost as frequently in ridiculously softball interviews with his sweetheart Becky Quick. Of course Cramer is being paid to do the show, I assume, and hopes to sell books no doubt. But though he might tend to name drop about his professional pedigree a bit much (one thing I don't like about him) I doubt he left Goldman and the hedge fund world penniless and needing the show to feed his family. So portraying him as some snake oil salesman parting fools from their money, which then goes into his pocket, is not reasonable IMO.

Also fundamentally the strongest pillar of Bogle-ism is not to pay other people a lot in the hope they can manage your money to beat the market. And Cramer agrees with that. The pseudo-pillar that everyone should only buy index funds is a lot weaker. Doing your own homework to buy individual stocks yourself, with low commissions and turn over, is not particularly likely to under perform index funds, or at least no axiom says so, nor strong empirical evidence either (studies of what individual investors earn have all kinds of methodology problems, and none AFAIK has ever even attempted to break out what people following a Crameresque strategy earn compared to all other individual investors). And Cramer is not particularly hostile to index funds in general: the statement in the OP is not out of character for him.
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Re: Cramer's sane moment on Gross' exit

Post by jaab »

5-10 stocks is a good idea for active stock pickers. I am talking about people who really want to bet on company specific influences. If the bets work out is the big question, obviously. :D

Otherwise you will end up more and more with a portfolio of systematic factors, bascially late Graham's "value indexing" or momentum indexing or whatever. Just regress funds like Sequioa (U.S. midcap value + quality/profitability) or Templeton Growth (developed markets value) to see it. Stockpickers? Yes. Diversified? Yes. Excess returns in the longer run? No. Such a portfolio may still be a good idea however, depending on the costs. You don't have to pay fund fees to Bridgeway, RAFI, DFA and the like, although you will get a higher tracking error to the target factors when "only" buying 50 stocks.
Last edited by jaab on Fri Oct 03, 2014 7:00 am, edited 1 time in total.
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Re: Cramer's sane moment on Gross' exit

Post by normaldude »

htdrag11 wrote:Not sure if it's the right forum, but I found Cramer's concluding remark rather apt for our group here:

"But if you're trying to build a retirement portfolio that uses diversification and asset allocation to lower volatility, it's far simpler and more sane to own bond index funds instead."
That quote is from the article's author (Mitch Tuchman), NOT Jim Cramer.
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Re: Cramer's sane moment on Gross' exit

Post by Johno »

jaab wrote:5-10 stocks is a good idea for active stock pickers. I am talking about people who really want to bet on company specific influences. If the bets work out is the big question, obviously. :D

Otherwise you will end up more and more with a portfolio of systematic factors, bascially late Graham's "value indexing" or momentum indexing or whatever.
This is where DIY stock pickers and BH's (assuming that actually excludes DIY stock picking) can talk at cross purposes. They mean different things basically by 'diversification'. The anti-stock pickers are basically assuming you can't do stock picking, so you want to increase the number of uncorrelated firm specific influences till they largely cancel out, debating based on historic correlation of stocks whether that's 15 or 50 or whatever, but it's not nearly as low as 5. OTOH the DIY stock pickers are specifically trying to find favorable firm specific circumstances. They just don't want their entire return to rise and fall on one such decision, and in that context 5 different decisions (in different sectors too) diversifies that decision risk to a significant degree. Whereas going further than 5 dilutes the amount of attention they can pay to each decision, and at some point means including stocks they are less sure about. So like many Cramerisms '5 gives true diversification' is not a ridiculous statement in Cramer's context. It's only a ridiculous statement assuming that Cramer's premise, that individuals can add value to their portfolio's by doing their own homework and picking their own stocks, is wholly false.

And anyway Cramer doesn't reject the idea of somebody having part of their money in index funds and part in DIY stock picking, where even an anti-stock picker would have to admit the deviation from true diversification (in their concept) is not that great. Also the whole thing is partly entertainment, not only the show and his shtick, but the whole idea of stock picking. It can be a fun hobby with part of your money. And the worst case downside even with just 5 stocks and no index fund (though one would hope with some non-stock assets) is not really that different than an index fund when the wheels really come off the market, especially if the stock picking bias is toward larger companies which it tends to be.

I don't stock pick myself, except occasional short term single stock option plays. But anti-stock pickers can sometimes create straw man arguments against people like Cramer, and claiming he doesn't know what he's talking about because he doesn't propose picking 50 stocks is an example. There's no reason to pick that many stocks if stock picking actually works, IOW the disagreement is on that basic point, not some misunderstanding by Cramer about diversification.
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Re: Cramer's sane moment on Gross' exit

Post by htdrag11 »

normaldude wrote:
htdrag11 wrote:Not sure if it's the right forum, but I found Cramer's concluding remark rather apt for our group here:

"But if you're trying to build a retirement portfolio that uses diversification and asset allocation to lower volatility, it's far simpler and more sane to own bond index funds instead."
That quote is from the article's author (Mitch Tuchman), NOT Jim Cramer.
You're right. Thank you for the correction.
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Re: Cramer's sane moment on Gross' exit

Post by arcticpineapplecorp. »

The first time I lost respect for Cramer is when I saw this:
https://www.youtube.com/watch?v=c6gxPCurDJs

The second time is when I saw his meltdown with Dan Solin:
http://www.dailyfinance.com/2009/04/20/ ... -meltdown/
http://www.dailyfinance.com/2009/04/17/ ... ttacks-me/

The third time is when I heard him recommend 5 stocks in different industries as his idea of "diversification"
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Re: Cramer's sane moment on Gross' exit

Post by Clearly_Irrational »

arcticpineapplecorp. wrote:The third time is when I heard him recommend 5 stocks in different industries as his idea of "diversification"
For stock picking that's actually a decent number. You want few enough stocks that you know a lot about them but not so few that you're too concentrated in one industry. Basically you're diversifying away sector risk but not stock risk.
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Re: Cramer's sane moment on Gross' exit

Post by TravelerMSY »

Cramer can't really specify an hour per stock per week for monitoring time for a part-timer investor, then go on to say you need 30 stocks. Hence the 5.
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Re: Cramer's sane moment on Gross' exit

Post by arcticpineapplecorp. »

Clearly_Irrational wrote:
arcticpineapplecorp. wrote:The third time is when I heard him recommend 5 stocks in different industries as his idea of "diversification"
For stock picking that's actually a decent number. You want few enough stocks that you know a lot about them but not so few that you're too concentrated in one industry. Basically you're diversifying away sector risk but not stock risk.
I believe there are more than 5 sectors, so no you're not diversifying enough to diversify away sector risk.
I think when I heard his recommendation of 5 stocks they were large cap, not mid/small...so he's not diversified away size risk
Don't think the 5 he recommended were value stocks, so hasn't diversified away style
The 5 he recommended were U.S. stocks, so hasn't diversified away country risk.

Other than that, his recommendation is great :oops:
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Re: Cramer's sane moment on Gross' exit

Post by potatoman »

My undergrad degree is in finance and accounting. I took a class where we managed an investment portfolio with real money and our entire balance was composed of about 20 stocks. The rule of thumb at the time (according to my prof, I think he cited the journal of finance or some such thing) was that 20 to 30 positions was about right for diversifying away non-systematic risk. The additional benefit from purchasing another 2, 5 or 10 stocks wasn't worth as much as the first 20.

I was able to take this investing class for two semesters (and get credit twice - I didn't fail :happy), each time with a different professor. The first professor was a very old guy who had made most of his personal money in big pharma companies like pfizer and eli lilly (he gave someone a poor grade for the semester after that person wrote a report recommending to sell LLY ). Under him, the portfolio was more or less a mini S&P 500 index. When the second professor came in and took over the class (a younger guy - probably early 40s and was a co-owner of a local asset mgt company) he thought the portfolio was a little silly since we mostly owned major companies. He said if this is what we want, we could save a lot of time by purchasing an index fund. Neither professor thought we should hold fewer positions.

Cramer may recommend five because it's manageable, but it isn't what I learned and it sounds a little concentrated. For indexers or anyone who doesn't want to invest a minimum of an hour a week per position, anything less than a few hundred holdings per fund is probably unacceptable :D .
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Re: Cramer's sane moment on Gross' exit

Post by Clearly_Irrational »

arcticpineapplecorp. wrote:I believe there are more than 5 sectors, so no you're not diversifying enough to diversify away sector risk.
Opinions vary, but generally there are nine or ten sectors depending on how you slice it. Holding five of them would do a reasonable job of avoiding the worst sector concentration problems. Remember, these are supposed to be stocks you've heavily researched.
arcticpineapplecorp. wrote:I think when I heard his recommendation of 5 stocks they were large cap, not mid/small...so he's not diversified away size risk
Don't think the 5 he recommended were value stocks, so hasn't diversified away style
Size and value risk can't be diversified away, only a preference for more or less exposure expressed.
arcticpineapplecorp. wrote:The 5 he recommended were U.S. stocks, so hasn't diversified away country risk.
Obviously not, though that wasn't one of the objectives.
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Re: Cramer's sane moment on Gross' exit

Post by JW-Retired »

Johno wrote:
And anyway Cramer doesn't reject the idea of somebody having part of their money in index funds and part in DIY stock picking, where even an anti-stock picker would have to admit the deviation from true diversification (in their concept) is not that great. Also the whole thing is partly entertainment, not only the show and his shtick, but the whole idea of stock picking. It can be a fun hobby with part of your money. And the worst case downside even with just 5 stocks and no index fund (though one would hope with some non-stock assets) is not really that different than an index fund when the wheels really come off the market, especially if the stock picking bias is toward larger companies which it tends to be.

I don't stock pick myself, except occasional short term single stock option plays. But anti-stock pickers can sometimes create straw man arguments against people like Cramer, and claiming he doesn't know what he's talking about because he doesn't propose picking 50 stocks is an example. There's no reason to pick that many stocks if stock picking actually works, IOW the disagreement is on that basic point, not some misunderstanding by Cramer about diversification.
I have sort of a soft spot for Jim Cramer myself. I haven't seen his show in years but I did enjoy his first book "Confessions of a Street Addict" published in 2003. This was pre-bogleheads and very entertaining.

Strangely enough, my reactions to the book were very bogleheaded. I recall: 1. He stated that in the first large brokerage firm he started working in nobody had the slightest concern with making clients money, it was just all about getting their assets under management. i.e., might as well do it yourself. (He felt he was the lone exception in at least trying to make clients money.) 2. His descriptions of the goings on once he had his hedge fund operating made it clear to me no individual investor had a prayer of success stock picking against these 24-7 insider connected fanatics. 3. Even with the 24-7 schedule Cramer's hedge fund survival was a very near thing. He almost went broke.

My personal takeaway was I would be nuts to do anything but index.
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Re: Cramer's sane moment on Gross' exit

Post by Pizzasteve510 »

arcticpineapplecorp. wrote:The first time I lost respect for Cramer is when I saw this:
https://www.youtube.com/watch?v=c6gxPCurDJs

The second time is when I saw his meltdown with Dan Solin:
http://www.dailyfinance.com/2009/04/20/ ... -meltdown/
http://www.dailyfinance.com/2009/04/17/ ... ttacks-me/

The third time is when I heard him recommend 5 stocks in different industries as his idea of "diversification"
Thanks for posting this. Pump and dump strategies are a sad testimony to the lack of ethics training in Business schools and for those trusted with financial stewardship of our capital markets. I goofed around with alternative capital market ideas for a while and wondered if equities with fixed minimum hold times would outperform. A study by a former employer suggested governance ethics positively correlated with higher PEs, but no one ever pumps that finding. To much testosterone!
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Re: Cramer's sane moment on Gross' exit

Post by nedsaid »

A family member follows Cramer and the spouse has joked that the divorce papers would mention "that damned Cramer."

I like Jim Cramer. He is utterly human and he has probably opened up to his audience a bit too much. If you can get beyond the maniacal antics on his show and his seemingly manic-depressive personality you find a thoughtful and intelligent person. I suspect behind that a decent human being. He admitted that his family did an intervention because they didn't like the person he was becoming. And unfortunately, he and his wife "the trading goddess" ultimately divorced. The pressure of the hedge fund business got to him and he got out.

He was in a very rough and tumble business. Whether or not you like the hedge fund business, at least I have a certain grudging respect for the guy for surviving through all of that. I saw the clip where he admitted to spreading rumors about companies to aid his trading strategies and I was honestly surprised that he didn't earn a lifetime ban from the Securities Exchange Commission. I was a bit aghast at that admission but it was a revealing look as to what goes on behind the scenes on Wall Street.

I think he feels bad about this and his show and his books are a bit of a confessional. He worked really hard at what he did and I think he felt a deep obligation to his clients. I read somewhere that he almost went bust at one point. I respect that he has revealed a lot about himself and not all of it flattering.

But no doubt the guy is brilliant. He is a trader with a trader's mentality. He is a maniac. He is very un-Boglehead. But I think he is well worth listening to even though I am not a trader and invest in a much different manner than he does. And I listen to him even though he has been wrong on some things.

For some reason somehow I like the guy. You gotta hand it to him, he lets it all hang out and you see Jim Cramer warts and all. I have read that in person he is a really nice guy and that the people on CNBC have liked working for him.
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Re: Cramer's sane moment on Gross' exit

Post by garlandwhizzer »

I don't like Cramer's manner or antics but I do agree with nedsaid that he is earnest in his attempts to help investors. He believes in the advice which he is giving. He makes some calls right and some wrong, like all active stock pickers but his motivation to help the average investor is, I believe, genuine. He is a prime cheerleader for active management, concentrated portfolios into few "well selected" stocks which I don't believe is a good alternative to low cost broadly based index funds for most investors. When I listen to him bemoan the way that the tide is shifting, that investors are moving away from active stock picking into index funds, a sadness rings in his voice sometimes. It is as if he realizes that his entire life has been spent trying feverishly but imperfectly to achieve something and now he witnesses that the sun may be setting on both him and the path he has chosen.

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Re: Cramer's sane moment on Gross' exit

Post by Johno »

Clearly_Irrational wrote:
arcticpineapplecorp. wrote:I believe there are more than 5 sectors, so no you're not diversifying enough to diversify away sector risk.
Opinions vary, but generally there are nine or ten sectors depending on how you slice it. Holding five of them would do a reasonable job of avoiding the worst sector concentration problems. Remember, these are supposed to be stocks you've heavily researched.
arcticpineapplecorp. wrote:I think when I heard his recommendation of 5 stocks they were large cap, not mid/small...so he's not diversified away size risk
Don't think the 5 he recommended were value stocks, so hasn't diversified away style
Size and value risk can't be diversified away, only a preference for more or less exposure expressed.
arcticpineapplecorp. wrote:The 5 he recommended were U.S. stocks, so hasn't diversified away country risk.
Obviously not, though that wasn't one of the objectives.
I agree with those responses. It's a failure of logic to hold up Cramer's '5 stock' idea as evidence Cramer doesn't know what he's talking about so his premise* must be false. If his premise is true, the investor does not want to diversify away company specific risk, but rather pick the stocks with favorable company specific situation relative to price. 30 or 50 stocks is the mathematical answer for 'almost fully diversified' based on past historical data (the 'correlation among stocks', assuming a covariance matris with a single value except on the diagonal) and theoretical *assumptions* Cramer doesn't share. Same with size, style, and country and in those cases it's risking hypocrisy for BH's who accept 'small value tilting' or not diversifying international in the big BH tent but would criticize Cramer for not buying the whole global market cap weighted. 'Diversification' in Cramer's context means somewhat diversifying the decisions as to which (US, predominantly) stocks will out perform, and also avoiding picking stocks which are too similar to one another (in sector particularly). It's not the same concept of diversification as in efficient market/CAPM theory of the world where it's assume you can't pick stocks at all. People should just say about Cramer: 'I don't agree with DIY stock picking' (or say he's annoying, that too) and leave it at that. They don't show their understanding in a favorable light with the criticism about diversification IMO.

And the diversification bust on Cramer is the wrong way around when it comes to some actively managed mutual funds (as opposed to DIY stock pickers). Some of those funds pick too many stocks thus tending to diversify away a lot of their own decision making about which stocks are best, with picks that aren't as well researched or picked for other reasons (eg. own stocks 'everyone owns' for fear of underperforming if those stocks do well, but not as worried if they don't, because 'everyone' will be penalized). IOW they become 'closet indexers', but still charge more than index funds.

*that individuals can profitably pick their own stocks, not pay for active management; it's also misleading to say 'Cramer favors active management' as if all kinds.
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