Rethinking Investing – Part 3 – Spotting Mistakes in Jon Stewart vs. Jim Cramer

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The Daily Show: Jim Cramer Interview – Hulu. Having trouble? Try installing AnchorFree, and if that fails, get a taste with this clip.

The unanimous conclusion after stockmarket pundit Jim Cramer appeared on The Daily Show with Jon Stewart last week was: Jim got his ass kicked.

Be that as it may, were the facts straight? I will defer here to Mark Hanna, Trust Officer at Clayton Bank and Trust in Knoxville, TN. I first met Mark at the 2008 Berkshire Hathaway Annual Shareholder’s Meeting, where he was wearing a manager badge and discussing complex financial instruments.

Clayton Homes
was sold to Berkshire Hathaway in 2003, and founder Jim Clayton hired Mark to start a Trust Department within his bank — Clayton Bank and Trust — to manage proceeds from the sale. Mark didn’t want me to share his personal annualized track record, but trust me: it’s phenomenal…

Here is his interpretation of the Daily Show interview, bolding mine:

The stock market tends to capture public attention primarily for two reasons: irrational exuberance or disappointment in misplaced faith.

Today the stock market is on the minds of many because the belief that the market goes up over time has again been called into question. Capitalizing on this attention, Jon Stewart has given Jim Cramer a public scourging in a now viral video from the Daily Show. Mr. Cramer may have deserved at least part of this flaying, but Mr. Stewart, representing the lay view of the current situation, falsely implies that investing in stocks is as safe as “betting it all on red”.

Mr. Cramer’s fault lies not in poor advice to buy or sell specific stocks, industries, or the market as a whole. His sin, and that of the media in general, is stirring the emotions of those who hold stocks as a long-term investment, turning them into short-term speculators. CEOs have lied, and people will always lie to further their own self-interest, as is the nature of man. We have been led astray, believing falsehoods that have caused loss of investment. Now in our panic we are guilty of believing the lie that stocks are, by nature, gambling.

Mr. Stewart asserts that as 401k investors, we are “financing the adventure” of hedge funds; that short-term traders HURT long-term buy and hold investors. This view is incorrect, and to paraphrase Buffett, here’s why: if you are a long-term investor in stocks, you want prices to decrease over your buying period so that you are able to buy more at better prices.

Still, Stewart’s thought that managers rewarded themselves for short-term performance at the expense of shareholders is right on. There are significant problems with corporate governance and a general lack of shareholder rights. Too many times management and rainmakers are incentivized to take great risk while not held accountable for losses. Some firms evolved over time into enterprises whose business was to employ speculators and “send them to the casino every day”. In addition, many banks were excessively leveraged, and this was obscured through Enronesque accounting. Off-balance-sheet arrangements that blew up at Enron were criminal, but a “mistake” at Citigroup.

However, there has always been sound business activity in the financial sector. Loans to support creditworthy businesses and individuals have always been profitable activities in the western system of finance. By now it is clear that most of the gamblers within the banks are leaving the table, either of their own accord or by demand, which may slightly reduce profit but will also dramatically reduce risk. While there are some financials today that remain speculative, it is certain there has been an overreaction: many babies thrown out with the bathwater.

Investing in stocks is provably not speculation. If one were to own all of the stock of a company with positive earnings, cash flow, and net worth, this ownership would have value. Thus, there is also value in a partial ownership stake in this same business. Purchasing any asset at a price less than its value is not speculation. Perceptive investors realize that they are not investing in “the market”; they are actually investing in the companies in which they hold ownership shares.

The bottom line is this: gambling is never investing, and investing is never gambling. The trick for the savvy investor is to recognize the difference.

-Mark Hanna
Trust Officer, Clayton Bank and Trust

Related and Suggested Posts:
Picking Warren Buffett’s Brain: Notes from a Novice
Rethinking Investing – Part 1: Common-Sense Rules for Uncommon Times
Rethinking Investing – Part 2: Information Advantage, Best Books, and More
Things I’ve Learned and Loved in 2008 – Recouping Losses, etc.

Posted on: January 16, 2009.

Watch The Tim Ferriss Experiment, the new #1-rated TV show with "the world's best human guinea pig" (Newsweek), Tim Ferriss. It's Mythbusters meets Jackass. Shot and edited by the Emmy-award winning team behind Anthony Bourdain's No Reservations and Parts Unknown. Here's the trailer.

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74 comments on “Rethinking Investing – Part 3 – Spotting Mistakes in Jon Stewart vs. Jim Cramer

  1. While I am sure Mr. Hannah is a brilliant investor, I believe his rebuttal is off Stewart’s point. Stewart’s primary argument was not that Jim Cramer made good or bad market calls. Nor, does he claim to be able to make better calls.

    Stewart’s problem laid with the financial news network not reporting “real” news. But instead parroting back what CEO’s “tell” them without further investigation.

    The biggest issue isn’t whether Cramer is a good or bad investor, but rather are networks (CNBC) reporting NEWS or spreading corporate propaganda.

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  2. Those are words of wisdom.

    However, this is the first time that i read that speculators short-term traders is a separate ecosystem from long-term investors and i love that.

    I love the “investing in a company rather than investing in the stock market”. I think that’s an healthy way of thinking.

    Thank for sharing,

    Auf Wiedersehen
    Michael – Berlin

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  3. The problem is lack of a level playing field between private individuals and those in the know. It may well not be speculation to invest in a successful company but, as Jim Cramer admitted, there are people like him manipulating the share price by spreading false rumors. People will only be convinced it isn’t gambling if the share price is truly driven my the company’s performance and not someone with a lot of money who is sending it up or down for his own purposes.

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  4. Neither video can be viewed in Australia “This video is not available in your country”. I looked it up on Youtube.

    I think that Tim makes some good points about company directors and management having too much power and the shareholders having too little. After seeing so many corporate collapses happen in Australia, something has to be done about this.

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  5. Everyone should also watch this 6-minute clip of an insider interview with Jim Cramer that the Daily Show pulled a few bits from. It shows how Cramer used to manipulate the market in a dis-honest fashion to further his hedge fund:

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  6. Hey Tim!

    The really interesting video is the one referenced in the Interview… I watched it and it’s sickening… Steward got the best parts of it, but it’s ridiculous how Cramer tries to weasel out of it. He says something along the lines of: “I said other people do it…” Whereas in the video he CLEAR AS DAY says “I DO IT! It’s fun and profitable” or something like that.

    Considering what a piece of s**t the dude is, I felt he came off way better than he deserved…

    I will never understand why Cramer EVER aggreed to the interview. What the hell did he think was the best that could happen? ;-D

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  7. If you are located outside the U.S. you can still watch Jon stewart vs Jim Cramer on youtube (episode 12th of March 09):

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  8. As Warren Buffet would recommend to the average investor, buying individual stocks and trying to time the market is the dumbest thing you could do.

    Purchasing index funds — which track an index, like the S&P 500 or the entire stock market — is the smartest, cheapest, least time consuming, and profitable route for the long-term investor.

    See the recent article from the NY Times: http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html

    “[Just] to break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. For the hedge fund, that margin would have to be 10 points a year.”

    Consumers need to stop relying on brokers and talking heads to determine where to invest their money. The only way to win is to understand exactly what your money is doing.

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  9. Some good points to the interview but Kramer shouldn’t be the fall-guy. I think people put way too much trust in corporate America sometimes…. which is ridiculous. The stock market is risky, period! If you don’t have the money to lose, don’t invest.

    Real estate (in the long run) has proven to be a much safer investment. Even in a bad market, you can still get renters to pay-down your mortgage.

    @MatthewLoop

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  10. Stewart stated pretty clearly that he knows Wall Street workers personally, and that he knows *most* of them work very hard at what they do. He was very specific about the difference between the long-term market that is presented in the financial “news”, and the short-term “real” market that some insiders work with.

    In short, there *are* people moving billions of dollars a day, driving stock prices up or down in ways that have nothing to do with the fundamentals of the company. There are enough people moving enough money that they can damage the system. As a hedge fund manager, Cramer was guilty of playing these games. As a “reporter” he is guilty of pretending it wasn’t happening.

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  11. Someone mentioned this briefly, but I feel it is worth repeating in greater detail. Stewart was not being critical of stocks as much as he was being critical of the way the financial markets are covered by “news” organizations. Glenn Greenwald made a great comparison last week between Cramer’s defense of CNBC and the late Tim Russert’s defense of the mainstream media’s stenographical approach to reporting leading up to the invasion of Iraq. Whether the subject is investing or war, the news media has become a set of talking heads for popular opinion instead of investigating the claims and reporting the facts. That was at the heart of Stewart’s criticism’s of CNBC and a very good point indeed.

    By the way, I have embedded the video on my site as well, for anyone interested, although you should be able to view it on The Daily Show’s website, as another commenter noted, no matter where you are located. Just watch the video clips, instead of the entire show and you won’t have any issues. Or you could always use an IP masking program…

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