Jim Cramer’s MAD MONEY: A Defense.

Posted on | January 26, 2009 |

Jim Cramer, the host of the stock trading television show Mad Money on CNBC, has received a lot of unfair attacks during this economic crisis. I first started watching Mad Money a couple of years ago as a guilty pleasure. With Cramer’s myriad sound effects, turbo charged segments—like the famous “Lightning Round” in which callers pitch him a stock and he gives a thirty second assessment and a buy or sell verdict—and a loud and brazen delivery, his neon flooded program is garish to say the least. After becoming a daily viewer of Mad Money, however, I discovered that beyond the entertainment, Jim Cramer is the most intelligent and clear-minded voice concerning the economy in the current media world saturated with Wall Street pundits pitching their opinions, tips and criticism.

The biggest attacks lodged at Jim Cramer have been purely reactionary and misguided. Last March, Cramer told a viewer that his money was safe in Bear Stearns. The media went on a blitz against Cramer when the brokerage giant collapsed within a couple of days and its stock became nearly worthless. In reality, the viewer did not ask about stock. He was wondering about his checking and savings accounts, a big difference. Cramer tried to alleviate concerns that people were going to lose their cash. If he had told his viewers that their money wasn’t safe, he could have irresponsibly caused a run on the banks.

I have also noticed a lot of nay-sayers claim Cramer has made exaggerated doomsday warnings ever since the market began to collapse. In reality, Cramer gave his viewers the sound advice to turn 20% of their investments into cash.

Critics love to attack Mad Money by tracking what would happen if one invested in a portfolio made up entirely of

Cramer’s “buys,” claiming it either underperforms or loses you disastrous amounts of money. What such critics do not address is the fact that such a “field test” uses a “buy and hold” strategy. Cramer repeatedly tells his viewers that his show does not give advise on (or advocate) a “buy and hold” strategy of picking stocks. Of course you could lose a lot of money if you bought the stocks he recommends, never monitor them, and hold all of them indefinitely! Frequently, Cramer makes the distinction between a “trade” and an “investment.” The first are stocks you thoughtfully and strategically build positions to trade around, whereas the latter are stocks you hold for the long term in things like mutual funds, ETFs or a 401K plan. His show focuses almost exclusively on picking stocks and building positions to trade around while monitoring each one closely. He never says this is all you should do.

So the other fallacious attack against Cramer is that his show rejects and ridicules mutual funds and retirement plans. Quite the opposite. One of Cramer’s biggest rules is that you should have a solid allocation of your portfolio in a passive investment, like a mutual fund that tracks the S & P 500, before you pick and trade your own stocks. Cramer’s critics claim that he advocates fast and impulsive stock trading. To the contrary, Cramer (particularly in the past several months) emphasizes above anything else remaining alert to the downside of any trading or investing, keeping 5% or more of your portfolio in cash, and always remaining diversified, no matter what.

He frequently reminds his viewers that you should never invest money you will need in the next five years. You should never invest money until you pay off credit card debt. You should never invest money if you don’t have a steady job and health insurance. You should never invest money if you do not already have some sort of retirement fund. And, most importantly, you should never pick stocks if you cannot dedicate one hour a week to each stock. Those who attack Cramer always forget this last rule. Far from impulsive and ruthless, Cramer demands that his viewers “do their homework” every week on each stock they own. If you cannot do your homework, you should not be picking your own stocks, and you should invest in a mutual fund or an ETF. And he never ridicules anyone for doing so. He just feels that a person can do better taking more control over their investments and taking the time to do their homework.

I think the biggest thing that his show has offered me is a sense of gaining some knowledge, authority and control over both my own finances and my understanding of the economy. Since I started watching Mad Money, I have grown far less passive toward my own investments. And it has paid off, even in this horrendous market. In a couple of previous posts, I reported that my own stock picks performed much better than my mutual funds last year. But he has also inspired me to be less ignorant about the economy and to become more interested, inquisitive and critical. It is easy as an academic in the humanities to remain uninterested in the business world.

Of course, Cramer is not always right. On numerous occasions he has been overly enthusiastic about a stock. But he always owns up to his bad calls. He does so every week. I am more impressed, however, with his economic and political insight, and the warnings he makes that are usually on target. He will probably be forever famous for his “they know nothing” meltdown concerning the Federal Reserve on CNBC in the summer of 2007. Now that we are suffering one of the worst financial disasters in history, we realize that Cramer was right. He voiced (very loudly) his warning well in advance of the meltdown by having a meltdown of his own. His idea at the end of 2007 that the government should buy the bad paper from the banks was right on, too. And we would have saved a lot of money if he had been listened to.

Listening to Jim Cramer in the context of other voices in the media has helped me to form my own ideas and feelings about the economy, and economic problems in political contexts, in ways I never had been able to before. As an academic, I want to understand and engage in many different discourses, and to see the world from many various perspective. Mad Money might be loud and garish television entertainment, but Jim Cramer has influenced me to see and understand the world differently. On his show, he always says, “we’re not here to make friends. We’re here to make money.” If I don’t make any money from Jim Cramer, at least I earned some knowledge.

Below is a link to his famous “they know nothing” meltdown in August of 07 on CNBC. Some people have suggested that it should be placed in the Smithsonian.

they know nothing

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