Cramer Sees the Light (But Misses the Point)

Posted on December 5, 2012 by Tony — No Comments ↓

Unfortunately, Jim Cramer is what is wrong with the 401(k) industry, in that, investors can manage their own portfolio. Most, if not all, are unable to emotionally manage their portfolio efficiently. To succeed in reaching your retirement goals you must develop a prudent strategy and reamin disciplined. This may sound easy but we are unable to make the proper decisions during times of stress. We need a coach to keep us disciplined and focused on our long term goals.

The plan proposed the most complex highway interchange attempted in Ontario to that point. (Photo credit: Wikipedia)

I am no fan of Jim Cramer. I don’t find him entertaining, although I can understand why many people do. My gripe is that his antics harm investors by making it appear his opinion on the direction of the market, or his stock-picking skill, adds value. It doesn’t. There is no evidence that his track record is better than what you could expect from random chance. In a scathing blog, Henry Blodget stated: “It would be impossible to write a ‘Bad Advice’ column about investing without discussing Jim Cramer.” David Swensen, financial author and Chief Investment Officer of Yale University, opined that Cramer “exemplifies everything that’s wrong with the advice — and I put advice in quotation marks — that is given to individual investors.” According to a 2009 study by Barron’s, “[C]ramer’s recommendations underperform the market by most measures.”I was pleasantly surprised to read a blog by Bruno J. Navarro at CNBC summarizing an interview he did with Cramer about 401(k) plans. Cramer is quoted as opining that most 401(k) plans “stink” because of high fees and lousy returns. He notes the entire system feels like it was set up to “… benefit the financial services industry, not you.” With typical bluster, he states that “almost nobody else” expresses these views.

He is mostly correct. The 401(k) system in this country is a disgrace. It is rife with conflicts of interest, high costs and terrible investment choices. The primary beneficiaries are the mutual fund industry and the brokers and insurance companies who “advise” plan sponsors.

He is wrong that only he has this insight. I set forth similar views in my book, The Smartest 401(k) Book You’ll Ever Read, published in July, 2010. Cramer’s nemesis, Vanguard Group founder John Bogle, recently observed that the 401(k) system is “profoundly flawed.”

Here’s the point Cramer misses entirely. The core problem with 401(k) plans — as Cramer noted — is terrible investment choices. Most plans offer primarily high management fees, actively managed funds, where the fund manager attempts to beat a designated benchmark. These funds are likely to underperform low-cost index funds over the long term, reducing the returns of plan participants. Since brokers and insurance companies can incrementally increase their fees by offering the more expensive funds, they often minimize or eliminate index funds from the investment options.

Active fund managers tend to underperform because they engage in stock picking, notwithstanding the numerous academic studies demonstrating that attempting to find mispriced stocks does not work.

What advice does Cramer’s Mad Money show dispense? Stock picking advice. Recently, he selected stocks he believes will benefit from a deal to avoid the fiscal cliff. This is the same activity engaged in by managers of actively managed funds in an often unsuccessful effort to “beat the markets.”

The logic underlying Cramer’s sage advice concerning the indefensible state of the 401(k) plan industry, applies with equal or greater force to his musings about stock selection. I applaud Cramer for taking on the 401(k) industry. Now he should do investors a huge favor by either dispensing academically-based advice about the perils of market timing, stock picking and fund manager selection or go off the air. Either option would be of immense benefit to investors.