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


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.

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

  1. The best of this is, appropriately enough, in BOLD.

    Virtually nobody in the media is pointing out that: In the case of a 401k, for instance, if you’re working now and retiring 10 or more years out, this down market is a great thing. Why? The market WILL recover, it always does, and in the meantime you’re buying in at depressed prices–stock on sale.

    If you’re already retired, and needing this money, that’s different story of course. Just like anything else, what benefits one may hurt the other. That’s business.

    And it’s human nature to complain, and it’s the nature of the media to climb a tree to find bad news when a positive angle is on the ground.



  2. This was a pretty “ballsy” post. You have a strong following here and I would imagine most of us disagree with Mark Hanna…

    “Investing in stocks is provably not speculation” hhmmm…


  3. As Neil Strauss points out in his new book (thanks Tim for the heads up), The united states has the 53rd freest press on earth. By my estimation, thats pretty un-free.

    The question seems to be weather or not news networks are giving us factual news or just hyped up propaganda.


  4. Does Stewart have thousands of stocks in his head? If you met Cramer in a bar and he decided to actually talk stocks with you, he’d know many of the symbols and ideals of the companies you asked him about.

    Cramer aint perfect but is certainly better giving advice than many fund managers. He understands fundamentals of markets and wants people to make money. Cramer admits when he is wrong.

    Stewart has tons of writers. Cramer has a staff, but this guy does his research on his own. His opinion is his, and he owns it whether he is right or wrong.

    Cramer is taking a beating due to his criticism of the Obama team. It does not matter that Jim has long been a self confessed democrat. He is now lumped in to the group of people who dare critique the “messiah”. He is entitled to his opinion and I am glad that he is critical of the earmarks and spending that the Obama team said never would happen!

    When Buffett who endorsed Obama 100% and who has advised Obama is critical then we know there is a problem.


  5. More exposure to the markets – more risk taken. Long term investing – the riskiest enterprise on the market. That’s a fact.

    Tim – I am very surprised that you’ve made that post. You out of everybody else gotta realize that CNBC is just a cheer leading bunch of idiots. Cramer has been exposed to so many trend reversals that his “predictions” and “advices” hold no ground and in fact he fundamentally is incapable of any kind of long term analysis. Like any other analyst out there.

    Nassim Taleb’s Black Swan is something to read on that topic.


  6. Tim

    So you ask a portfolio manager whether his whole raison d’etre is fundamentally unsound, and then POST IT?!

    1) Jon Stewart focused most on allegations of market manipulation, which are valid. The opaque structured credit derivatives and poor risk management created a market failure. Banks, credit rating agencies, and regulators all ignored the potential macro-downside of these innovations.

    2) I first heard about you (and am a big fan) from an interview with Nassim Taleb, author of Fooled by Randomness, and the Black Swan. You would enjoy Fooled by Randomness, which talks extensively about how so much financial information is ‘noise’. But it would blow apart your surprisingly naive faith in the logic of equity values.


    • Hi Rafael and All,

      Nassim Taleb is very, very smart. I’ve had dinner with him and agree with most of his approaches. Betting on anomalies is far more effective than most people realize. The problem, of course, is that most people don’t have the emotional detachment to lose money 364 days out of the year betting on the black swan, which inevitably comes.

      All the best,



  7. Investing in stocks is provably not speculation”

    Wow. This is the crux of his argument. I don’t care who Mr. Hanna is, this is wrong if words have any meaning. Mr. Hanna may have a problem with the word “speculation” in that, as of March 2009, financial people don’t want to be associated with it.

    We’re talking about degrees of risk – at what point in Mr. Hanna’s mind does investing cross over into speculation? When it’s someone else doing it?

    The mere desire to invest in a company that produces value is meaningless – if the value is fully factored into the stock price, buying it is irrational. And what’s worse: naked speculation, or buying into a stodgy old stock that’s clearly (irrationally) overvalued?

    No, you can’t avoid taking bets. When you invest you’re saying “I disagree”. And if you seriously disagree, you buy more, and you magnify your bet. Warren Buffett does EXACTLY this, but it’s Warren Buffett doing it, so Mark Hanna is cool with it.

    If you want to call something “usury” or hide from a word like “speculation”, that’s up to you, but you’re not saying anything, you’re just playing with language.


  8. @Many

    It sounds as if I chose murky wording for the paragraph:

    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.

    Clearly the first sentence reads with a different meaning when divorced from the rest of the paragraph. Instead, please read as intended [improved clarity]:

    There is a difference between investing and speculation; anyone engaged in either should understand the difference. It is provable that there is such a thing as investing in stocks (rather than stocks being solely speculative): If one were to own all of the stock of a company with positive earnings, cash flow, and net worth, this ownership would have some 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.

    Thanks all for the discussion.


  9. *warning: its long…seriously, don’t even go on if you’re not in the mood for a novel…Ok, I warned ya.

    @All with special emphasis on Naseem Taleb and Warren Buffet-

    In investing, people inevitably have their own “aha” moment where they read something that makes sense to them and decide that it must be the holy grail of outsized returns. It could be “Intrinsic Value”, P/E, growth, other people’s money, infrequent/untoward events, sector weighting, ETF’s, low cost index, dirt, the “Magic Formula”, gold, commodities, asset allocation, etc. Hell, they can even be so frustrated that they just lost 45% of their assets to a market downturn that they believe a mattress is the best way to get a great return on investment. Sometimes, even for long periods of time, they’ll be correct. The problem with this is psychology and the fact that they have the right answer but the wrong question.

    Every idea works some of the time. Some ideas seem to work more of the time, but participants in the game are too close to be objective in their assessments. Proofs and counter proofs exist for all forms. Arguments on any of them can become so convoluted and circular as to become like religious arguments. Their is no clear answer, and it seems to come down to what you believe and “have faith” in. Here are two excellent examples:

    Warren Buffet: The value of a business is seperate from the market’s current assessment of that value, and is truly the amount of money that can be extracted from that business over its lifetime. We should, therefore, purchase businesses with a durable competitive advantage, that offer us a margin of safety for unknowns, in a business category that we understand. If none exist, we don’t play. Their will be enouph opportunities over a long period of time that we can expect an outsized return on our investments.

    Naseem Taleb: Noone really knows what’s going to happen, but they see nonexistent patterns in the goings on of the world due to the way they’re wired. This leads to vast exposure to infrequent, high risk events for which society is highly undercompensated. This means that we should invest in bonds for the most part since if the whole country fails, investments will all be worthless anyways. We should, however, make frequent small bets on events outside of the “likely” realm so that when they do inevitably occur, we can profit mightily from them. We may seem like losers most of the time, but eventually we’ll be the big winner while hedging for our imperfect biology/psychology.

    So, who is correct? WB is worth a helluva lot more money than NT, but both sleep really well at night. Both are considered geniuses. Both have rabid fans. Both have more money than they really “need”. So, “correct” is ultimately the wrong question. Maybe the question is what do they have in common that leads them to their definition of “success” in their own worlds. I don’t know either man personally, but I can say comfortably that they share one psychological trait that is extremely pertinent: compulsion. Each has a compulsion so strong that it dominates his existence. He eats, sleeps, drinks, and constantly obsesses over it quite possibly to the detriment of other aspects of his life. In fact, he loves it so much that he is able to stand against an entire population’s “conventional wisdom” and suffer the slings and arrows of his inflexibility to do it his way.

    So, friends, what are you that passionate or obsessed over? Are you willing to give up vast portions of your “normal” life to be these two talented geniuses? Are you somehow different than the rest? Do you need it so bad that you can just sit on your butt like WB when there’s nothing to be purchased? That you can deal with every financial talking head saying you’re an idiot 364 days a year because you’re guaranteed to lose money most of the time? I doubt it in general…

    Outsized obsession=outsized return over long periods of time for the most part. Occasionally, humans benefit from a wind at their backs or a raising of the pond, but mostly its just attention to details, hard work, and some attention to the concept of secondary effects. Most people don’t have this obsession for investing, and as a result, get taken by the people that do. 401k’s, IRA’s, annuities, gold, realestate, etc…None of them are likely to give you an “outsized” return over time as most people (greater than 99%) don’t have any advantage. Most people, however, think they do and look to investing to provide them with things that they may actually really be obsessed over (more time, more money, more freedom, more stuff, whatever). This is what leads to heated discussions, booms and busts, and ultimately, finger pointing. Even people that are smarter than most of us will ever be, screw it up (IE the guy who thought up derivatives, an impressive list of quant traders, LTCM founders, Soros, Sheldon Adelson, the list goes on…).

    The question is what really matters to you? Is it most important for you to escape the 9-5 and live like the new rich? Is it to be the greatest investor of your style ever, or to prove yours is the best? I can’t guarantee that you’re going to be successful at any endeavor, but I can say that you’ll be much more likely to get the “outsized return” if you focus on what moves you.

    So, where does investment fit into your life? If its a means to an end, (as it is for most people) then you must get comfortable with the amount of effort/risk you must take to make that end most likely to occur. Don’t waste any more time than absolutely necessary to understand which style or method allows you to sleep the best at night so that you have enouph energy and resources to pursue your true passions.

    Style or method is material only to your personal psychological make up, proclivities and abilities. You will suffer alot less stress if you always first ask yourself: “Is this risk worth it?” in terms of your true motivations…AND THEN ANSWER THE QUESTION DEFINITIVELY.

    After many years, success and many tears, I can give you only one universal piece of investment advice:

    Lower your expectations.

    In the rest of your life figure out what really moves you, maybe lower your expectations, but let it rip anyways and live the life you dream of as much as possible.



  10. Actually, from one economic theory, about the most injust thing you can do with money is lend it and charge for the service. This goes along with the speculative markets in general. I like your blog very much, just found it through a friend two days ago and have read it all, and the book. Since you seem dedicated to reexamining things from first principles, I highly encourage a look at Margrit Kennedy’s work. She is a friend, and I met her as she was traveling and lecturing. The woman has an amazing life story, but aside from that, my point is that earning money from money is “usury”, something outlawed by several major religions, and though common economic practice now, I can make a strong argument for it being the main reason for the current economic downfall. Basically, if you increase the number of symbols in the economy, but don’t increase the amount of energy and commodity present ( i.e. have a bunch of traders making money through speculation) then you are essentially printing up counterfeit money that devalues everyone else’s greenbacks. In a sense, working for 4 hours a day, and outsourcing your life is based on the idea of smarter not harder, but someone is still working harder….if I wanted to make the most cash in the present economy, I would do the morally reprehensible thing, presuming I am free from the angels of my better nature, and print up the cash. If I can make my money make money, then all the poor shmucks that are trying to eat, spending the majority of their income on bills will forever fall behind if I can get a chunk of change outside the vicious cycle and let it exponentially increase….until the system is broken (i.e. people decide the game isn’t worth buying into anymore). This has been a long time coming. Anyway, here is Margrit’s work, much more elegant and complex than my rant as I run out the door to catch a film. ? the blog


  11. It would be nifty if one of Mr, Stewart’s critics would address his actual point, which is that CNBC should be mocked for claiming homeowners should have seen the coming trouble while CNBC did not.

    Also, CNBC’s Santelli should be ridiculed for his hypocrisy in not railing against the greater than hundred billion dollars in FDIC assistance GE has received.

    Unfortunately, most casual commenters do not understand the situation and most people who do understand the situation have too much bias to be honest.


  12. There’s a horrible logic jump here:

    “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.”

    The first sort of value could be fairly called “objective value”. The investment is actually returning money regardless of what other people think. The second sort of value is entirely contingent on either a) someone else thinking the stock is worth money, or b) the majority of shareholders agreeing that buying back stocks and paying dividends are good things.

    Scenario B is relatively rare. Scenario A is a crapshoot where the media holds the most important hand. Either one is a gamble.


    Nate (late to the game)


  13. I have a few problems with this response and with some of the long held opinions on investing that are out there.

    1) Warren Buffet was/is a good investor who made one really good call – going heavy on Coca Cola. That’s really it. Now, because he’s “The Warren Buffet,” he can pick a stock and people will step on their own mother’s necks to get a few shares regardless of any quality that the company may or may not posses. Buffet’s philosophy, while logical, is old and really only works for him now because he is who he is. It does not account for…

    2) …market manipulation, which if you watch the interview, was part of Stewart’s argument. While he was more critical of CNBC and financial reporting in general, he still addressed (in the clips of Kramer that he played) the shenanigans that fund managers pull to influence stock prices. Tim, you witnessed this first hand, as you mentioned in your previous post:

    “100,000 shares of Genentech sold because a no-nothing guest had pulled the name out of thin air.

    That was my introduction to how truly rigged the stock market is…”

    3) So, if shady influence affecting the short term gains wasn’t bad enough for you (and your 401K), then let’s look at the long term. Hanna cites the Buffet-esque mantra:

    “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.”

    He describes these companies as having “positive earnings, cash flow, and net worth”


    April 10, 2008:
    Lehman Brothers, AIG, Citigroup, JP Morgan Chase, Bank of America, Goldman Sachs, Bernard L. Madoff Investment Securities and The Stanford Financial Group – companies with “positive earnings, cash flow, and net worth”

    April 10, 2009:
    Lehman Brothers, AIG, Citigroup, JP Morgan Chase, Bank of America, Goldman Sachs, Bernard L. Madoff Investment Securities and The Stanford Financial Group – CRAP!

    Simply put – there is ALWAYS risk to investing. Risk + Money = Gambling. You can gamble smart and increase your chances or you can gamble like a fool and lose it all. You can have a lucky streak or a losing streak. You can cheat and you can get cheated. The above companies were sure things a year ago. They were fixtures of American finance with solid numbers and they were being run by the “smartest” people. They cheated, you lost.

    How can Mark Hanna justify what he advocates against what happened to these companies? The answer is that he can’t. When established companies create false impressions that are either backed by other established companies or are so complex in nature that they can not be detected, one can be lead to believe that these companies are sound investments with high returns when they aren’t.

    Hell, many of the credit default swaps had AAA ratings!

    So how exactly are we supposed to find these undervalued, well-run, positive… blah, blah, blah?

    That felt good.

    Anyway, it’s completely unrelated, but I don’t really comment here, so; Tim, will you ever reveal how you got into Princeton? I mean, you’ve already covered a lot of the things in the book, so I was just wondering if you were ever going to let us in on that one.

    Best, -P


  14. I totally disagree with Mark Hanna’s comment that investing is not gambling.

    Any situation where money is put at risk for an uncertain future return is a form of gambling.

    It is an amazing comment from Mark Hanna since his ultimate boss – Warren Buffett – is one of the greatest investors / gamblers historically.

    Recently, Warren Buffett put a large put option on the value of what the S&P500 will be in the long term future (15-20 years) – effectively a bet with no ownership of any company involved.

    Also, historically, he made some large bets with significant portions of his investors’ money – like when he took a huge punt on Amex in 1962 when it was at risk of going bust from the Salad Oil scandal (read about it in Roger Lowenstein’s book – An American Capitalist).

    And finally, one of the biggest parts of Berkshire Hathaway’s business is insurance and reinsurance – essentially bets on future accidents and catastrophes, some of which are large and which Warren Buffett admits could cause some serious losses down the line.

    Just because Buffett and his subordinates are good at betting (like Mark Hanna is at betting that Clayton’s customers will repay their loans) doesn’t mean that they’re not gambling!

    In fact, if people knew more about gambling they might be able to approach their investments with more sensibility.

    I’ve blogged myself about one of Warren Buffet’s large bad bets in 2008 – on ConocoPhillips, where he didn’t adjust his thinking after his original thesis didn’t work (like a good gambler would) – and he lost big.


  15. If a person does not earn a lot of money, he can forget about having a comfortable retirement.

    The median household income is around $46,000 a year. Anyone making less than $150,000 a year cannot comfortably save for retirement and live a decent standard of life today. People are in too much debt to simply “contribute more”. They will not be able to simultaneously fund retirement, pay down credit card debt, student loan debt, mortgage debt, and raise a family. Many young people will chose to simply dedicate themselves to making more money and not being burdened with a family at all. The trend is already happening amongst upper-middle class people.

    People need to wake up to the reality that retiring will not be a luxury for 70% of Americans in the future. All retirement accounts will be heavily taxed. Even retirement accounts that are funded with after-tax dollars will be taxed. The laws will simply be changed and people will lose a great portion of their money to the government.

    This is not some “chicken little” scenario. It is a keen observation into the burdens of Social Security and Medicare. The government will soon run out of money to fund these programs. Those who have saved between $500,000 and $2,500,000 for retirement will bear the brunt of the new tax laws that will be passed. They will be considered “wealthy” and will be punished for their savings the same way the upper-middle class are burdened with the Alternative Minimum Tax. These new laws will make retirement in the U.S. simply unattainable for millions of middle class people that worked hard and have saved their money.

    The rich will have their money in investments that will generate great sums of money, but that will be taxed at a lower rate. They will also have enough money to consider retirement in foreign countries where their money will go further. The poor who have saved little to no money in retirement accounts will get by nicely. They will get generous government assistance that the middle class retirees will be paying for. Those who saved money under their mattresses will actually make out better than many of the people who have money in retirement accounts. They will have cash to buy things with and will still get government assistance because their “income” and retirement savings will be too low to be taxed.

    Wake up and watch out!


  16. You suggest using AnchorFree (Hotspot Shield) if having trouble viewing the hulu video at the top of your blog. I live in Germany and could not view the hulu video, so I tried AnchorFree (Hotspot Shield). It inserts a popup in the browser that is very annoying and it was a major annoyance deleting AnchorFree (Hotspot Shield). I believe that AnchorFree deliberately makes it difficult to delete their app. Please be more careful when recommending applications. Cheers!


  17. The market jumped 76% since this was published (and over the past decade has closed at a higher price than that day 99.44% of the time).