Why you should ignore, ignore, ignore Cramer

By Nick Kapur

updated 5:15 p.m. ET Oct. 11, 2009

Whatever money you may need for the next five years, please take it out of the stock market right now, this week.I do not believe that you should risk those assets in the stock market right now."
— Jim Cramer, Oct. 6, 2008, with the S&P 500 at 1,056.89.

One year ago, thanks in no small part to the statement above, I concluded that Jim Cramer was a menace to investors.

It only took a few months for the rest of the nation to catch on. Jon Stewart finally jumped on the bandwagon in March, exposing the man for what I think he really is: an entertaining (if not, irritating) media personality, but certainly not the champion of the individual shareholder that he often claims to be.

In fact, I consider him to be the closest thing there is to a walking, talking hazard for the individual investor. Stewart may have the jokes, but I have the real reasons why Cramer is such a danger, and why you should take a pass on any investment advice he tries to give you.

Thanks, Jon
I continue to fully applaud Cramer's stated goal — to help people make money by investing in the stock market. But Cramer's outburst last year was a mistake, plain and simple. And, as Stewart so kindly illustrated, it wasn't Cramer's first time giving such flawed advice.

You see, when someone issues panic-inducing market calls (as Cramer does from time to time) — and urges investors to avoid long-term strategies to buy and hold good companies — the average investor simply gets crushed.

Cramer's Oct. 6, 2008 plea on the TODAY show was grounded in a sound reality: Fools shouldnever have money they need during the next five years in the market. But by advising people to indiscriminately sell, he helped contribute to exactly the thing that he was supposedly trying to avoid — namely, investors losing money.

Chances are, when the market was taking a chainsaw to some of our more closely held assumptions about the U.S. financial system, most viewers were so petrified that even a very small push was all they needed to join the terrified herds pulling their money out of the market. And pull they did.

Between October and the end of November 2008, investors withdrew a whopping $140 billion from U.S. equity funds. Based on what these funds were holding, those fearful investors were indirectly pulling out of mutual fund mainstays like ExxonMobil, Qualcomm, Johnson & Johnson, Microsoft, and Procter & Gamble — many of which had already been hammered.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

With the market now priced just a bit above last year's "call," what the heck has Cramer's advice done for you? Perhaps he saved you money in the collapse that occurred in the ensuing months. But in order to complete the circle, he would have had to tell these people precisely when to get back in. Where the heck was he on March 6, when we reached the low? He was nowhere to be seen on national television. Those people who were convinced to run for the hills just missed out on one of the biggest market rallies ever — that no one saw coming. No matter how good his first call was, that's 50 percent he won't be able to give you back. And therefore, it was a huge mistake.

Instead of holding onto the steady blue-chip stocks that have historically provided investors with some of the strongest long-term returns, many investors were just progressively selling at historic lows ... thereby ignoring the sound and sage advice from names like Buffett, Lynch, Graham, Munger, and Bogle. That's the larger point.

You don't need a weatherman ...
I'll admit that Cramer is entertaining, but no one can consistently forecast the direction of the market as he pretends to be able to do. I repeat: No one can consistently forecast the direction of the market. That is the point.

It moves completely unpredictably over the short-term, which means that trying to make a "call" on the market won't consistently work out for you. Pick a direction (up or down), and you have a 50 percent chance of being right — even though the prediction is rather meaningless.

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