Wednesday, October 15, 2008

Jim Cramer: Buy High / Sell Low?

Recently, CNBC's Jim Cramer advised his viewers to pull out from the market all funds they will need in the next five years. From our point of view, as we discussed here, this is how investors should be positioned at all times! As the market is subject to wild swings, you can't rely on the market to offer you good prices in the short-term!

But the fact that Cramer recommends pulling out of stocks now, after the market has dropped, illustrates the fundamental difference between the mainstream finance industry and value investors. To value investors, stocks have become more attractive. While to those who pay little attention to financial statements in making their decisions, stock declines make stocks less attractive. Such investors are prone to psychological bias: when things are going well, they think the good times will never end; when things are going badly, they think the end of the world is near.

As an example, here is Jim Cramer discussing Bear Sterns 6 days before it went down:



If you understand what you're buying (i.e. the net assets and earnings power) in the stock market in the same way as you do when you make private transactions, you will feel comfortable riding out economic storms and will reap the rewards by buying low and selling high.

5 comments:

Anonymous said...

To be fair, he said to pull out any money you will need within 5 years, which should always be the case. Regardless, these are the times we save cash for.

Epic Ahab said...

Around a year ago, Cramer was saying "Dow 14k by year end."

He's a tout. You can be entertained by him but don't follow his advice.

Anonymous said...

And how many times has he called a bottom and been wrong!? Who cares if we're at a bottom or not, buy a company if your analysis says they're cheap, and if prices drop buy more!

The funny thing is that he probably will eventually call a bottom and will boast this to everyone who watches his show even though a person with half a brain could call the same bottoms and eventually be right also.

- I almost hope the stock market continues to decline so that retail investors who follow cramer lose interest in the market and stop watching his show and it goes off the air. Cramer as a person seems like a great guy, but I just don't want to hear his opinons on the market everytime I turn on CNBC.

Anonymous said...

Who is Jim Cramer? Is he someone on TV?

Why would a value investor even bother absorbing anything in the media? Or waste time reading blogs...

Oh wait...

I guess I'm not a value investor anymore...

Carl Richards said...

Great post.

I guess I am not surprised that people watch Crammer, but I am shocked that anyone acts on what he says. At best his rants are entertainment and investing and entertainment DO NOT MIX.

Carl
www.behaviorgap.com

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