And a big "Boo-Yah" to you, too
Every so often, I tune into stock pundit and radio host Jim Cramer. The founder of TheStreet.com is, if nothing else, high energy. I admire his passion and willingness to share insights regarding how the markets operate.
I'm less fond of his approach to making money in the market. Cramer advocates a rapid-fire trading system based upon insights gleaned from a variety of sources. My major problems with this approach are:
1) Most investors have neither the time nor the discipline to track individual stocks on a daily basis
2) Frequent trading racks up needless commission expenses
3) Trading of individual stocks is -- by definition -- riskier than using mutual funds to invest in buckets of stocks or specific sectors
To Cramer's credit, he does advocate mutual funds for beginners (I believe his favorite is Fidelity Contra, an immense fund that has had remarkable results). But 99% of talk time is devoted to individual stocks.
USA Today's Matt Krantz took a look at Cramer's performance. What he found was fascinating:
|Cramer's picks have gained 16.2%, on average, from the show's launch March 14, 2005, through March 27, 2006. That makes the Standard & Poor's 500 gain of 7.3% look pretty sad...|
...The median market value of the 606 stocks in the Cramer list was $6.8 billion... so it doesn't really make sense to compare Cramer's performance to the S&P 500, which is heavily weighted toward large-cap stocks.
What if we compare Cramer's results to a midcap index fund such as the iShares S&P MidCap 400 index exchange-traded fund? Had you ignored Cramer and simply bought IJH on March 14, 2005 and held it until March 27, 2006, you would have been up 16.4%. That's dead even with Cramer's performance.
...But it's not quite fair to compare Cramer to the IJH either. His picks include large- cap stocks and some foreign plays. So I asked IFA.com to calculate the return of the basket of index mutual funds it recommends for risk-tolerant, results hungry "mad money" type investors. The return of this portfolio, after fees, was 21.8%, trouncing Cramer's return.
...Don't forget the cost of the time it take to follow Cramer... [and] Fees. Had you followed Cramer's advice, you would have had to buy more than 606 stocks, according to the CNBC data. Even if you use an online broker that charges just $5 a trade, you would have spent $3,030 in commissions...
Lesson: invest in diversified mutual funds with strong track records and reasonable fees. It's hard to go wrong with that approach. And it's a lot less time-consuming.
Matt Krantz: And a big "Boo-Yah" to you, too