Mar 14th, 2009 at 5:48 pm
Jim Cramer Has All The Wrong Friends
Apparently Marty Peretz thinks Jim Cramer’s just great.
It’s worth noting that what Peretz calls “democratic capitalism” — the idea that ordinary people should speculate in the stock market — is just a fraud. There’s a strong case to be made that people saving for the long run ought to own some equities via an index or the like. But what Peretz and Cramer are selling is a lie designed to swindle people out of their money.
75 Responses to “Jim Cramer Has All The Wrong Friends”
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March 14th, 2009 at 5:57 pm
Didn’t you know? Peretz gave Cramer one of his first breaks to expand being known outside of Wall Street. Greenwald(aka Glennzilla) write about it earlier this week.
March 14th, 2009 at 6:02 pm
Peretz bitching about a media assassination is priceless.
March 14th, 2009 at 6:03 pm
Marty Peretz is a neo-con whore.
March 14th, 2009 at 6:07 pm
Since I’m not a cable tv subscriber, I’m not very familiar with Jim Cramer’s show. But I don’t understand why Matt seems to think that “ordinary people” should not purchase individual stocks if they want to.
March 14th, 2009 at 6:15 pm
But I don’t understand why Matt seems to think that “ordinary people” should not purchase individual stocks if they want to.
Why not just send them to a casino? They’ll have more fun.
March 14th, 2009 at 6:30 pm
What Stewart did a great job at expressing was that the joke has been on those of us who didn’t fall for the stock picking scam and put our 401Ks into index funds and the like. We got hosed as Cramer’s buddies played with our money.
March 14th, 2009 at 6:31 pm
Peretz projects just a little bit when he calls Jon Stewart a limousine liberal.
Good thing Stewart (like Peretz and Cramer) is Jewish, or Peretz would have found a way to work the anti-Semite label in there, too.
March 14th, 2009 at 6:34 pm
Yes, yes, yes, yes.
Picking stocks is for suckers. Almost nobody can do it well, it’s been proven. Yet if the market is trending up, it’s easy to think you’re picking winners.
John Bogle of Vanguard sings this song, and there is research…Henry Blodget is another who wrote a series of pieces for Slate and a book on this topic.
Do. Not. Pick. Stocks. And learn about expense ratios.
March 14th, 2009 at 6:35 pm
Why not just send them to a casino? They’ll have more fun.
Jake, one reason is that they can purchase stocks from their own home without having to travel to Las Vegas, Atlantic City, or a Gulf Coast gambling boat.
Seriously though, I think this recent crash has demonstrated that index fund managers don’t really know what they’re doing, investing people’s money in businesses they don’t understand like financial companies with crazy bundled derivatives. People may actually be better off reading the Wall Street Journal or Investor’s Business Daily and building their own portfolios with strong companies that have simple, understandable business models. Also, I believe it is worth pointing out that some investment funds have recently turned out to be gigantic frauds.
March 14th, 2009 at 6:48 pm
“Didn’t you know? Peretz gave Cramer one of his first breaks to expand being known outside of Wall Street.”
Peretz gave Cramer his first break when Cramer was still at Harvard. It’s not a secret: Cramer wrote about in his autobiography (”Confessions of a Street Addict”).
“John Bogle of Vanguard sings this song, and there is research…Henry Blodget is another who wrote a series of pieces for Slate and a book on this topic.
Do. Not. Pick. Stocks. And learn about expense ratios.”
That Henry Blodget has a soapbox at this point — in finance, no less — is unfortunate.
As for Jack Bogle, eh. He’s been beating the drum about buy & hold indexing and low fees for decades, and folks who followed his advice still got their heads handed to them in the last year. Most equity investors would have been better off paying a few basis points more in fees and investing in John Hussman’s equity fund, which was partially hedged.
For that matter, they would have been better off listing to Jim Cramer when he warned retail investors to sell their stocks when the Dow was at 10,000.
March 14th, 2009 at 7:07 pm
they think that anyone who disagrees with them is evil.
Not anyone.
And, you haven’t shown why ordinary people should speculate in the market. (You’ve been cold calling?)
March 14th, 2009 at 7:14 pm
“Seriously though, I think this recent crash has demonstrated that index fund managers don’t really know what they’re doing, investing people’s money in businesses they don’t understand like financial companies with crazy bundled derivatives.”
It is a flaw of index investing that it poured money into a lot of financial stocks just because they were (a large) part of the major indexes. It also happens to have been a flaw of a number of prominent value investors (e.g., David Dreman, Richard Pzena, etc.) who were buying financial stocks all the way down.
A different objection to indexing — one that I think was made by Peter Lynch — was a moral one: it’s bad for the economy, because it impedes the function the market is supposed to provide in using the wisdom of crowds to allocate capital. It also puts a lot of power into the hands of unelected arbiters such as the members of S&P’s index committee, who pick what stocks go into the index.
March 14th, 2009 at 7:14 pm
Huh. I’m a liberal, and I disagree with MY. But I don’t think he’s evil. I wonder if he thinks I’m evil? I wonder if I’m an evil genius? I’ll use my super evil genius powers to extort One. Million. Dollars!
Then I’ll put that money in a stock index fund.
March 14th, 2009 at 7:36 pm
Amazing. In defending Cramer, Peretz offended not only Stewart, but Jimmy Carter, Jim Fallows, and Edward R. Murrow. Edward R. Murrow? Is Peretz nuts? Geez! And he now owns TNR again!
March 14th, 2009 at 7:39 pm
Investing in equities is indeed a sucker deal for individuals, because the movement in stock prices has nothing to do with the underlying value of a company–p/e ratios, what a rational person with unlimited resources would actually pay for 100% ownership, or any other rubric based upon the enterprise as an enterprise–and everything to do with the collective psychology of others who are investing in equities. It’s only slightly distinct from gambling: in gambling the game has a trivial outcome by design (i.e. nothing in the wider world is impacted by a basketball team or a horse winning or losing), while in stock investing it’s the link between the game aspect and the nominal real-world element has been broken.
March 14th, 2009 at 7:42 pm
I know, let’s pretend not to know anything about the stock market, Jim Cramer, CNBC, the events of the past week, the events of the past year, and how the business media have fallen into ill repute.
Sound good to you, Al?
Playing dumb is what you do when your side is caught dead to rights.
March 14th, 2009 at 7:45 pm
Rich in PA,
As Buffett’s mentor Ben Graham said, “In the short run the market is a voting machine; in the long run it is weighing machine”. In any case capital appreciation (i.e., price movement) isn’t the only reason to invest in equities. There are still stocks out there that pay dividends, including classes of them that pay out almost all of their earnings as dividends (e.g., royalty trusts and MLPs).
March 14th, 2009 at 7:48 pm
S.P. Gass Says:
Seriously though, I think this recent crash has demonstrated that index fund managers don’t really know what they’re doing, investing people’s money in businesses they don’t understand like financial companies with crazy bundled derivatives. People may actually be better off reading the Wall Street Journal or Investor’s Business Daily and building their own portfolios with strong companies that have simple, understandable business models. Also, I believe it is worth pointing out that some investment funds have recently turned out to be gigantic frauds.
Do you even understand what an index fund is? Clearly you don’t.
March 14th, 2009 at 8:19 pm
1. Jim Cramer gets some kudos for going on Jon Stewart’s show. Also, if anyone is seriously watching Jim’s shows for stock advice, except when he discusses general principles, well, then please contact me as I have just establish the rickster guarantee 25% annual return on investment Brooklyn Bridge Fund.
2. The thing about an index fund is that it is not “managed” as the stocks purchased from an particular stock index in the ratios those stocks weigh in that index. If you buy the Vanguard Russell 2000 index fund that fund will simply go up and down with the Russell index and you own some stocks in all the companies in that index.
3. In the great Bull of 1982-2000, index fund investors generally outperformed most other mutual funds, especially because they index funds charged lower fees since they were on autopilot and not “managed.”
4. CNBC, like all Cable News now, is pretty much about “narrative,” loud talking heads in an he said – she said format, and asking folks to make “predictions” about things when the only logical answer is “I don’t know” about what will happen and when. I would say this, CNBC tends to be better in the early morning to lunch time. Worldwide Exchange gets people on the show outside of the libertarian social bubble that so many American financial people seem to live in as they get folks on from Europe and Asia, Squawk Box will often have some pretty sensible guests along with David Faber’s, Steve Lismann’s, and (though he is a true libertarian), Charlie Gasparino does some actual reporting. But around noon, the celebrity journalists (Maria!!) and rightwing hacks (Larry Kudlow) take over. On the housing bubble, I will say they were no worst then the Wall Street Journal, the New York Times, the Washington Post, etc. who were all terrible.
4. When you read from people you trust that stocks are overvalued and that the P/E ratio indicates that stocks are expensive, then it is time to rebalance one’s investments and savings. I took money out of the stock market in 1997, 98, 99, and 2000 and put them into TIPPs. I am sure that my total assets would have appreciated more in each of those years if I left all the money in stocks, but I decided to take some of those gains and preserve them in a safe, low return investments. Did the same in 2007. Because I still left about a 1/3 in my index funds I have gone down 10%, but considering how everyone else has done, I will take that this year.
5. Feel free to invest in individual stocks if you want, but if you are doing it based on tips heard on a cable show, you might have more luck at the horse track. Successful stock picking, like successful handicapping, means lots of research, going over SEC documents, and learning how to read the footnotes of financial statements. I enjoy reading the Motley Fool, but I have learned enough to know how much I don’t know.
March 14th, 2009 at 8:29 pm
A different objection to indexing — one that I think was made by Peter Lynch — was a moral one: it’s bad for the economy, because it impedes the function the market is supposed to provide in using the wisdom of crowds to allocate capital. It also puts a lot of power into the hands of unelected arbiters such as the members of S&P’s index committee, who pick what stocks go into the index.
Serious question:
Do you have a better suggestion for an investment that is expected to match the growth of a broad sector of the economy but that does not involve paying a substantial cut of the investment for money managers to guess what stocks to buy?
A computerized fund that chooses investments based on market cap rather than inclusion in any index like the S&P 500?
S&P funds are the cheapest I’ve found in terms of expense ratios. Make a cheaper one and I get out of S&P funds tomorrow so better people than that board can determine where capital is allocated.
Stocks are a fraud, Las Vegas is a fraud, Lotto is a fraud. If people want to invest, who are we to tell them they can’t?
March 14th, 2009 at 8:34 pm
Being incorrect does not imply fraud. I keep seeing attacks all over the internet that basically start with a very defensible premise — that managed investments are largely a fools game, especially for retail investors, and therefore Jim Cramer’s advice will in expectation harm those who follow it. However, they then move to and “And thus he is a fraud.”
The unspoken assumptions, needed for that argument to work are:
1) Jim Cramer has had a lot of professional experience in the equities Markets. True.
2) He must know that retail investors are often out gunned, and that even professionals are often bad at stock picking. True again.
3) He must therefore know that his advice couldn’t really help retail investors. false.
Thus, his aim was not to help retail investors.
If you read his autobiography, Confessions of a Street Addict, you’ll see that
1) He got started on his path to professional finance via retail trading.
2) He was enabled to leave his salaried job, and make most of his wealth as a hedge fund manager, because after a lot of on the ground research, he made a few very profitable retail stock/options bets.
It’s very natural for humans to form general beliefs based on single, but high impact events (for better or worse). I see no reason to believe that Jim Cramer couldn’t believe that he could help retail investors do what he did. The show is after all aimed at how to make riches with your “mad money” not your retirement nest egg.
My parents’ retirement will not be jeopardized by any losses they incurred after making small stock purchases based on Cramer’s advice. Their managed funds, and index funds are being crushed, largely due to the actions of the more sedate fund managers and bank CEOs who show up on CNBC during the daytime.
Thus, I think all the Schaudenfreude aimed at Jim Cramer may be a bit misplaced. He may be wrong. He may be a clown. But he was also one of the more honest voices that plainly acknowledged that picking individual stocks for timed trades was like gambling (an idea that CNBC’s anchors often blanche at). His position simply seemed to be that people can gamble and win (much like Edward O Thorp thought that if played well, readers could put themselves in a position to do well at black jack).
He should be hit for his softball CEO interviews and bad stock calls. However, I don’t think there is a slam dunk case to be made against his intentions.
March 14th, 2009 at 8:46 pm
Do you even understand what an index fund is? Clearly you don’t.
lfv, I thought index funds invest people’s money to try to replicate the returns of an stock index like the S&P 500. I hadn’t known that some of them worked automatically via computer programs rather than human fund managers. Why would that be the best method for buying stocks? I’m pretty sure The Investment Business Daily top100 stocks have pretty consistently outperformed major indices like S&P 500, etc.
March 14th, 2009 at 8:57 pm
Well, if working class people had put their money in saving instead of 401(k)s, how much better off would we be right now?
Was the awesomeness of 1983-2006 (which, mind you, was miniscule) worth wiping out the capital of a generation?
If the answers are no and no, then MY is right.
March 14th, 2009 at 9:03 pm
Wasn’t Matt’s post about Marty Peretz, or did I miss something?
March 14th, 2009 at 9:08 pm
S.P. Gass
If you figure that, just because of the law of average, half of the people investing will beat the market and half the people will do worse, then an index fund of the entire market puts you right at the average. If you further note that an index fund has far lower expenses than a managed fund or trading your own stocks, by 1% or more, and that most people have a tendency to chase returns. It has been shown that by investing in index funds you will do better than 90% of the people out there because of the 50% you beat automatically, the next big chunk you beat on expenses, and then the chunk you beat by not chasing the market.
That’s basically the argument of Bogle and the other index pushers. Decide for yourself whether you agree.
Also, you don’t need to invest only in an S&P fund, which is dominated by large caps. You can find indices for all cap sizes or even the entire US market, both growth and value, domestic and foreign, specific sectors, and now even with indices constructed based on things like dividend payment rather than market cap.
March 14th, 2009 at 9:09 pm
“Was the awesomeness of 1983-2006 (which, mind you, was miniscule) worth wiping out the capital of a generation?”
I’ve been holding my tongue on a lot of this nonsense, but I can’t let this one go.
No capital has been wiped out. Money has been lost. Capital is sitting idle. Wars and earthquakes wipe out capital. Bursting bubbles don’t. Ever.
APS
March 14th, 2009 at 9:10 pm
That should be “better than something like 90% of the people. I don’t remember the real number.
March 14th, 2009 at 9:10 pm
Well, if working class people had put their money in savings instead of 401(k)s, how much better off would we be right now?
Luke, I see your point, but selling stock is an important way for companies to raise capital and create jobs.
Others, one problem with index funds, mutual funds, and the like are that people are putting their money in the hands of so-called experts who spread their money into some bad companies. I remain unconvinced that this is advantageous over researching and purchasing individual stocks. My 401k is down more than my personal portfolio. Unfortunately, I have far more invested through my 401k.
March 14th, 2009 at 9:10 pm
one reason is that they can purchase stocks from their own home without having to travel to Las Vegas, Atlantic City, or a Gulf Coast gambling boat.
All the more reason to legalize online sports betting, so that the TVs turned to CNBC can switch back to the sports channels.
As for Cramer: don’t hate the playa, hate the game.
March 14th, 2009 at 9:31 pm
Luke, I see your point, but selling stock is an important way for companies to raise capital and create jobs.
It’s really not, 99% of what gets traded has nothing to do companies raising capital. Real humans have nothing do with IPO sort of offerings anyway.
March 14th, 2009 at 9:31 pm
Re Marty Peretz, it should be noted that one tends to be more forgiving of bad advice from people like Jim Cramer when one is playing with the wife’s money instead of one’s own.
March 14th, 2009 at 9:45 pm
For what it’s worth, I think that anyone who pursues a “buy and hold in an indexed fund” is a moron. One of the few advantages the small investor has is his far greater mobility — he can get in quickly and get out quickly. It’s stupid to not use that.
In my personal opinion, its best to screen stocks to see which ones are outperforming the index in the past few weeks, look at those anomalies to figure out why they are rising and if they are likely to do so, chose what look like good prospects, move in for 4 months or so and then bail when need be. (Disclaimer: Note that I’m not giving financial advice. Your situation may vary. Consult your financial advisor).
In my opinion, where people really screw up is in refusing to dump a dog when it’s day has passed. Also, in buying something without really knowing why they are buying it. Of course, it takes times to do research.
Of course, before all that, you need to look at whether the time is right to be in stocks at all. Compare the Dow to Gold over the past 5 years.
In my personal opinion, any long term bonds purchased now will turn to shit when interest rates go up and when inflation hits. And if you don’t think that’s going to happen –with the US government currently financing TRILLIONS in debt via short term Treasuries — you’re not thinking.
The Chinese are in for a bath unless they dump quickly. And if they do that, we’re fucked.
March 14th, 2009 at 10:08 pm
I’m thinking and I don’t believe in inflation in the near term. The soveriegn wealth funds and the masters of the universe who control the massive pools of wealth in the world aren’t leaving the U.S. They have nowhere to go. We fucked up about as bad as you can economically fuck up and instead of the capital fleeing it went to the treasury. If there was another serious candidate out there they would have went there.
It takes dollars to buy oil. When we went off a cliff, part of what happened was *oil* got unwound instead of the dollar. I’d have thought what we were doing was impossible a few years ago, but here we are.
Until some place looks safe for the global pile of money to move (and look safe for like 20 years!), it’s not going anywhere. That’s what it would take for serious inflation to happen here.
March 14th, 2009 at 10:10 pm
“Do you have a better suggestion for an investment that is expected to match the growth of a broad sector of the economy but that does not involve paying a substantial cut of the investment for money managers to guess what stocks to buy?”
You could look at some of the low-cost funds or ETFs that screen based on various fundamental metrics, instead of simply including every stock that’s in an index.
March 14th, 2009 at 10:17 pm
Another option, for those who are concerned with fees: You could pay for a membership on a site like the AAII (I forget how much it is, but it’s pretty cheap) and buy the stocks on its shadow stock portfolio, or one of its other screens yourself. Depending on how much money you have to invest, your total fees (including the site membership and trading commissions at a low-cost broker like Scottrade) could end up being lower than a Vanguard index fund’s fees, and your performance might end up being better.
March 14th, 2009 at 10:21 pm
Of course, before all that, you need to look at whether the time is right to be in stocks at all. Compare the Dow to Gold over the past 5 years.
Don, I wish I was smart enough to have purchased gold at $300/ounce. Oh well.
March 14th, 2009 at 10:37 pm
I understand the point being made, but one must understand that roughly half of the American people own some type of stock. So, please dispense with the silly and unserious argument that what happens on Wall Street is meaningless drivel for the investor class. People who push that talking point should be taken as the fools that they are.
March 14th, 2009 at 10:37 pm
советую ознакомиться…
Apparently Marty Peretz thinks Jim Cramer’s just[...]…
March 14th, 2009 at 10:57 pm
So, please dispense with the silly and unserious argument that what happens on Wall Street is meaningless drivel for the investor class.
Anyone making that arguement is silly, but I see it as a *problem* that half of the people in this country are in the market. That’s stupid and it’s a recipe for exactly what happened to happen again.
March 14th, 2009 at 11:29 pm
I thought last year would be the year for cooling the mark out, but it looks like this is the year. Goffman used that phrase to talk about a particular form of anger management. When you are taken by a conman, the conman has to figure out, after the con, how to cool the mark’s anger. This is, of course, the position of the con GOP soviet after those who believed the rightwinger libertarian crap watched it all blow up. Many of those people actually started out when they were children as normal, with normal brains, but they have learned, over the years, to self-lobotomize. Some, though, not only nodded in approved dittohead fashion to racist radio, but actually put their cash into ‘American capitalism”. In the Bush years, American capitalism was pretty close to organized crime. The difference, of course, was that the criminals were running the government. Of course, they were often only amplifying idiocies that went through the Clinton, Bush and Reagan years – the whole deregulatory mindfuck, the absurd notion that the speculative part of the economy is more important than the part that produces real goods and services, which is the kind of thing that only an autistic Chicago school economist can really believe. The right’s people are wonderful forgetters, which is an advantage – all the meth and oxycodone – they quickly forget, for instance, that Republican Phil Gramm, America’s fave shithead senator, financial advisor to McCain, and all around Heritage Institute immortal, was the guy who deregulated the mortgage industry and made heartfelt pleas for the poor to be given subprime mortgages without any pesky bureaucrat looking over the shoulder of the lender. You would think with such a broad ideological and newswothy trail behind them, the rightwing vultures would have lost the sucker crowd, but this isn’t true. Cooling the mark out involves several dimensions. One is to find other enemies – Blacks! – and that is something your dittohead can chew on for months. However, the most clever way is simply to provide noise. They love noise. The rightwinger, seeing a redfaced prosperous looking white guy screaming on tv, is immediately comforted. It reminds him of … Daddy. The way he used to hit mom. And, for that matter, beat the little tyke rightwinger, but didn’t he deserve it? So they continue to present arguments that make no sense to those who haven’t suffered voluntary lobotomy. For instance, that the collapse of the market has to do with … a Negro! Obama – that must be it.
They also are easily led to do contradictory things – for instance, they are led to get angry, like red in the face angry, by the very suggestion that one shouldn’t, as a sane person, play day trader, and at the same time they urge a policy of letting the “chips fall where they may”, meaning of course that the rest of the banks would collapse and any money you did, stupidly, leave in equities could have been better thrown into a river or a local garbage dump. But loveably enough, they will return, arms outstretched, to make the same arguments over and over.
Self lobotomy is a horrible thing to see.
On the other hand, to me, wanting to burn the last connection between middle America and the speculative sector, they form a sort of bemusing contingent. In a way, I want them to succeed. Blowing up Wall street (which will take away the entire object of CNBC, so it will have to switch to, say, filming strippers mudwrestling to please the same rubes), would be just the thing to move this country far to the left.
March 14th, 2009 at 11:32 pm
“Anyone making that arguement is silly, but I see it as a *problem* that half of the people in this country are in the market. That’s stupid and it’s a recipe for exactly what happened to happen again.”
Ed,
Frankly, even if that’s the case is *our* problem. Thanks for caring, but I don’t need a nanny telling me what to do with my money. And about this Jon Stewart/Jim Crammer thing, I was a fan of The Daily Show since Stewart’s Crossfire appearance.
I believed him to be a premier satirist, liked the way he pointed out George W. Bush mistakes and contradictions. Now W. is gone and suddenly Jon Stewart is the white house lap dog. He didn’t even care to make fun of Tim Geithner, the incompetent tax cheat heading treasury.
Everything that Jim Cramer did, everything that Stewart pointed out last Thursday happened before Obama was elected. Jim Cramer endorsed Obama, why didn’t Stewart go after him then? So Crammer doesn’t like the way Obama is handling the economy or whatever and now Stewart is indignant about the Bear Stearns thing?
That’s hypocrisy…!
March 14th, 2009 at 11:36 pm
An interesting question is which is a bigger gamble: Playing craps in Sheldon Adelson’s Las Vegas casino or buying his stock (LVS — Las Vegas Sands).
Stock was around $140 /share back in Nov 2007, recently cratered at around $1.42 !!! per share but has just clawed its way back to around $2.27 (possibly a bounce because Sheldon forced resignation of his COO)
So you gotta ask yourself “Do I feel lucky?”
Well, do YOU punk ?
Sheldon, of course, was supposed to be the sugar daddy who would revive Neocon fortunes after the 2006 election with a major propaganda operation called Freedom’s Watch.
But A lot of Neocon pundits were disappointed over the past two year because they just couldn’t come up with a proposal good enough to get Sheldon’s approval and investment, no matter how hard they tried.
ha ha ha
A mean little fucker named Chin Shengt’an expressed it best:
“I wake up in the morning and seem to hear someone in the house sighing and saying that last night someone died. I immediately ask to find out who it is, and learn that it is the sharpest, most calculating fellow in town.
Ah, is this not happiness? “
March 14th, 2009 at 11:40 pm
“So, yes, I think many people should still be (very passively) investing in stocks. But that is not what Cramer was all about.”
Business Week, “Jim Cramer: Mad No More?”:
March 14th, 2009 at 11:41 pm
News reports indicate that Sheldon Adelson lost $22 BILLION last year from LVS’s decline.
Ah, is this not happiness?
March 14th, 2009 at 11:43 pm
Re Roger at 43: “I thought last year would be the year for cooling the mark out ”
—————-
I myself have a lurking fear that the whole Obama campaign was a ..er..”pigeon drop”.
March 14th, 2009 at 11:47 pm
He didn’t go after Jim Cramer, he went after Rick Santelli. Jim Cramer just bitched about it and got stung.
Jon Stewart can’t force you out of the market. Do whatever you want, but I want an old school pension instead of my screwed up 401k.
March 15th, 2009 at 12:32 am
but do you really believe that you and your E*Trade account are going to beat the professional arbitragers and their supercomputers to those market inefficiencies?
Supercomputers have proven good at playing chess, but they can’t accurately predict the weather more than a few days out. I’m not sure that they are any better when it comes to investing in stocks.
March 15th, 2009 at 12:53 am
DTM @ 42.
According to other reports on the interwebz that ‘100% in equities’ is out of date and Roubini has said more recently that he is mostly in cash
see comments here:http://www.marginalrevolution.com/marginalrevolution/2009/03/betting-your-ideas-part-ii-nouriel-roubini-edition.html#comments
March 15th, 2009 at 1:00 am
DTM,
“The professional arbitrageurs are doing this full time, with supercomputers. Again, a retail investors cannot hope to beat those people to any limited and transient market efficiencies that might exist.”
This may have to be my final post for the night, but I’ll check back tomorrow for your response. Regarding what you’ve written above, there is no way a retail investor can compete with the sort of black box trading systems hedge funds like SAC Capital use, but there are different ways to invest. Regarding those “limited and transient market [in]efficiencies” you refer to, let me ask you a few questions.
Would you consider it a market inefficiency if a company’s stock traded for less than the company’s net cash? How long do you imagine it would be before the market ended such an inefficiency by bidding up the price of the stock to at least the value of its net cash per share? If you had the ability to invest in a basket of such stocks while they were still selling below their net cash, would you? Or would you still prefer to buy an index?
March 15th, 2009 at 1:04 am
Re DTM’s comment “there are many of these outfits, all extremely well-funded, all competing with each other to be the first to identify any mispricing that may temporarily occur in the markets, before their fellow hunters bid it away.”
———-
1) I don’t think they’re that far-seeing — i.e. possessing the intelligence to look 4 months out and gamble on a long term trend rather than a short term advantage. Computers can’t analyze the real world yet. And the analysts are conservative in longer term projections because they don’t want to lose their jobs by going out on a limb.
2) Plus I don’t think the big boys are that agile — moving billions in or out of a stock hurts you. If you’re selling, your big blocks start driving the price down so you are losing money just from trying to unwind. Similarly,abrupt big buys start driving the price up and make it a lot more costly to acquire a position.
If you try to avoid these distortions –where you are basically screwing yourself — then you have to spread your investment out over several days or weeks. In that event, you are moving more slowly and become more like a big oil tanker than a speedboat.
March 15th, 2009 at 1:12 am
DTM-
If this is the FT article you are referring too:
http://www.ft.com/cms/s/0/7a4c06c4-dbc8-11dc-bc82-0000779fd2ac.html
it’s not exactly ‘recent’ in the context of current financial events (feb 2008) – or the date stamp is wrong.
March 15th, 2009 at 1:19 am
And are YOU better at predicting the weather than the supercomputers?
DTM, I haven’t tried weather forecasting just yet, although it is something I’m interested in.
Thanks for your thoughts and have a good night.
March 15th, 2009 at 2:14 am
An index fund isn’t going to help you much now…
March 15th, 2009 at 2:16 am
Actually you can make money with a fully computerized automated short term trading system. In the late nineties I was involved with the development of a system for a financial services company that you could turn at the market opening and it would buy and sell during the day untouched by the human brain. Since the transaction cost was minimal (for a financial company it is much less than for you and I) and it would both short and go long the system made quite a bit of money in simulations. I have moved on so I don’t know if they are using it.
The only problem was that if you did not have at least ten to twenty million dollars to start with you would be wiped out quickly as there is a lot of short term fluctuation in the returns.
I think if multiple parties traded using such a system, all sorts of weird cooperative phenomena could emerge without the participants actually explicitly conspiring to affect the market. Since such systems are definitely being used, stock trading is definitely not for the retail investor any more, Cramer’s and CNBC’s advice notwithstanding.
March 15th, 2009 at 3:27 am
Gravy sucking pigs.
March 15th, 2009 at 3:29 am
OOPS. Wrong thread. That goes on the AIG thread.
March 15th, 2009 at 6:00 am
обзор блогов…
There’s a strong case to be made that people saving for the long run ought to own some equities via[...]…
March 15th, 2009 at 6:58 am
While almost half of Americans own stock in one form or another the vast majority of those are in employer run plans in which the “owners” have no say.
Only about 8% of Americans, some 24 millions, own stock on an individual basis.
And that number includes many millions who, like my mother, bought Coke and GE stock in the 50’s and 60’s and 70’s and the certificates have sat unmolested in their files ever since.
While it may well be true that individuals’ day trading is a fool’s game it can hardly be said to be the threat to Western Civilization Matt would have us believe.
After all Cramer is an entertainer. His show is called MAD MONEY not INVEST YOUR KIDS’ COLLEGE FUND. My god the man is on cable!
I am heartily tired of the poor poor stupid and greedy people whining about the price of their greed and stupidity.
I don’t care if they are Palm Beach former millionaires who knew Madoff was too good to be true but invested anyway or some schlub who signed a mortgage document that he couldn’t understand. Hell I lost some 20K before I bailed as the tech bubble popped and nobody bailed me out. Nor should they.
Before nailing Cramer to a cross I think we’d do better to outlaw all games of chance, including all state lotteries and church bingo games and office pools, and then nuke Vegas for good measure.
March 15th, 2009 at 8:18 am
Gravy sucking pigs.
OOPS. Wrong thread. That goes on the AIG thread.
Well that could also apply to CNBC.
March 15th, 2009 at 10:02 am
Because Peretz proteges are salted throughout the media, MSM-bashing and Peretz-bashing can frequently be combined in a satisfying twofer.
March 15th, 2009 at 10:08 am
In response to my comment [And the analysts are conservative in longer term projections because they don’t want to lose their jobs by going out on a limb.]
DTM responded: “AHAHAHAHAHA! Good one.”
—————
I wasn’t talking about what they tell the rubes.
IF the market was efficient, then bubbles would not develop because the market would spot the emerging bubble and short it before it grew.
Instead, look at reality:
The yield curve inverted significantly in Dec 2006 — as I noted here:
http://matthewyglesias.theatlantic.com/archives/2006/12/the_sweet_sweet_fed.php#comment-119132
Everyone knows that’s a sign someone’s screwed the pooch — and the smart money is hurrying down the rat lines.
So did the market pull back? Nooo — the Dow was bid higher up until late 2007.
So how is that working out?
March 15th, 2009 at 10:21 am
What an absurd notion from all of the left-minded posters. So individuals aren’t sophisticated enough to invest in individual securities with their own money–what do you care? Is it because you don’t want the government to bail them out when/if they lose it in the same way you’re willing to bail out millions of people who invested in homes they couldn’t afford? Maybe the answer with the latter is to ensure that they can’t get loans in the future and can’t own homes. Oh, but that wouldn’t do because people NEED a home and it’s completely different when someone goes broke trying to get a home than when they use their own money to buy a stock.
Another point: Have index funds changed over the years? Why did they change? Because companies like Microsoft did so well that they became an integral company in those indexes. You’re telling me that 20 years ago noons made money investing in Microsoft? Actually millions of Americans have made money in Microsoft…and we ought to take that ability away because you might have lost money.
Honestly, do you guys have kids? The way you treat everyone else, I wouldn’t be surprised to hear that you still encourage them to breastfeed until they’re 18.
This is the very worst side of liberalism. Isn’t anyone a fan of Bill Clinton on the left anymore? How about Hillary, she got richnot following your paternalistic insanity.
March 15th, 2009 at 11:58 am
Utterly incoherent, Smithe. The point is that for a retail investor, he might as well be gambling. The efficient market hypothesis isn’t strictly true for day traders and the big firms–information propagates at a rate they can take advantage of, they have more information, etc. That, however, is not true for the retail investor, whose base level is something like the S&P and where any deviations above that are balanced by deviations below it, pretty much at random. Some wins, some losses.
If you really are a believer in the sophistication of typical individuals, send me a check for a hundred grand, and I’ll manage it for you at half the fees of the people at the big firms.
March 15th, 2009 at 12:51 pm
Zephyrus,
Wrong, the difference between this and gambling is that the house doesn’t have better odds–the individual investor does, provided he doesn’t take unnecessary risks (unless he chooses to).
Also, is it no less gambling when the government takes someones money and “invests” it in securities…with the hope that someday it may provide a safety net to you. Considering the people who live in poverty that rely on Social Security to pay the bills…that sounds like a much larger “gamble” to me.
March 15th, 2009 at 1:26 pm
No, not necessarily.
Say the firm has $50 million in cash left. Say it is also burning through cash at $50 million a week. Net cash doesn’t mean much in that situation.
Or say a firm has $50 million in cash, and their motion for summary judgment in a lawsuit against the firm for $750 million just got denied and the case is going to a jury.
And so on.
Those are two examples of why a company with net cash might soon be in danger of losing it, but would you assume that something like that was the reason why a stock was trading for less than its net cash or would you do five minutes of research to rule those possibilities out? E.g., checking what the company’s burn rate (if any — it could be profitable) was in previous quarters or seeing if it is involved in any litigation?
And if you don’t consider a company trading for less than its net cash to be an example of a market inefficiency, what would represent such an inefficiency, in your view?
March 15th, 2009 at 2:14 pm
DTM,
You sound like a hardcore EMH adherent.
“Now you seem to be hypothesizing something like, “The company’s stock is trading for less than net cash and there is no possible explanation for that given all available information”.”
I didn’t say that there are is “no possible explanation”. In fact, I think one possible (and likely) explanation for why there are more stocks trading for less than their net cash today is that more investors have given up on stocks as an asset class after the recent crash.
“Loosely speaking, I’d say a market inefficiency occurs when it is possible to obtain risk-adjusted profits from arbitrage in market-priced assets using only information already available to the markets in question.”
What would an example of this, in your view?
March 15th, 2009 at 4:12 pm
When you’re playing against the house at a casino, you have a negative expected value. But if you’re playing against the market by picking stocks, you have a positive expected value because on average stocks go up. That’s a pretty big difference. But, like casino gambling, it’s still a bad idea unless you’re doing it for entertainment with small amounts of money that you can afford to lose.
Putting your life’s savings into Coke is a much better investment strategy than putting them on the Roulette wheel, but it’s still not a good idea.
March 15th, 2009 at 4:50 pm
Re DTM’s comment “Wrong, as anyone who has studied this issue knows. You can make money being long in a bubble during the period the bubble is growing . . . and they often grow for years. Of course you would want to switch to a short position before the bubble burst, but not until right then.”
————–
So some fleas can’t hope onto the sled dog for a ride?
Stocks don’t appreciate in a sudden one-day jump — it takes them months to rise. And declines takes months as well. A small invester can be in or out in a day.
March 15th, 2009 at 4:54 pm
Also , data is not the same as information — and information is not the same as perception/understanding. The last item takes intelligence (er, mental, not spy kind)
March 15th, 2009 at 8:52 pm
DTM,
Markets are mostly efficient, particularly in the long run, but I think they are less efficient then you seem to think. I also think that the market for smaller stocks is less efficient than the market for larger, more widely-followed stocks. Let me flesh out why I think that with an example of a particular small company trading for less than its net cash, KSW Mechanical Services (one I unfortunately bought before the recent crash).
KSW is HVAC contractor in New York. I can tell you the proximate reason why it’s trading for less than its cash: a few months ago, two big projects in its backlog of business were put on hold. Beyond that, with the real estate bust, there are obvious concerns with a construction-related company. That said, the company is profitable and also does maintenance and new construction work in the government and not-for-profit sector — e.g., hospitals, court houses, etc. — and still has a backlog of business equal to about 70% of its revenues over the last year. In addition, it’s bidding on two new government projects next month that could potentially double its backlog.
So what should this company be worth? Some value investors might attempt to project out an earnings stream and discount that back to the present to come up with an “intrinsic value” for the company. I happen to think that sort of thing can lead to a false sense of precision. Another approach might be to consider what a similar private company might sell for. It so happens that I spoke to a business broker a few months ago who was selling a (much smaller) privately-held HVAC contractor in California. The minimum price his client was willing to sell for was several million dollars. His client’s HVAC company had $10 million in trailing revenues, versus about $87 million in trailing revenues for KSW.
Let’s imagine that this business broker was full of it, that he exaggerated his seller’s minimum price by factor of ten. Even in that case, his client’s company would be worth several hundred thousand dollars, and KSW would presumably worth more than that, as it’s a larger company.
A strong EMH adherent, I suppose, would argue that this company is worth whatever the market is currently paying for it. So what is the market currently pricing the company at? -$5.44 million (i.e., negative $5.44 million). This, I think, is an example of a market inefficiency. Reasonable people can disagree on what this company might be worth, but I don’t see how it can be worth a negative number — which is what the market is saying, considering that the company has, as of the most recently available data, $18.96 million in cash, no debt, and a market cap of $13.52 million.
KSW isn’t the only profitable company trading for less than its net cash today. There are more companies trading like this today than before the crash of the last year. That suggests that the markets are less efficient now than they were before the crash.
March 15th, 2009 at 9:58 pm
DTM,
“First, buying an entire private company would be more like taking over a public company, not buying a minor share of its stock.”
That’s what the enterprise value (-$5.44 million) represents: the theoretical net cost of taking over the entire company (assuming an acquirer didn’t drive up the share price in the process of acquiring it).
“Second, that should help you understand why “the company” isn’t being valued at $-5.44 million in your case (which I know nothing about, so I will treat it as a hypothetical). Rather, obviously the company as a whole is still being valued at $13.52 million”
If the company has ~$19 million in net cash, and the market is valuing the whole company for less than that, it is clearly assigning a negative value to everything other than the company’s cash (i.e., its business, its future prospects, its plant and equipment, etc.).
“it is entirely possible that people see the current management and/or strategy of the company as actually subtracting value from the company’s assets. That does happen, you know.”
It does happen sometimes, but the same management has been running this company (profitably and successfully) for years. There have been no recent critiques or calls for change that I’m aware of by the company’s larger investors.
“So again without knowing anything about this real company, you could see the pricing of its shares as representing a weighted wager on whether or not it gets taken over (good!) or goes bankrupt (bad!).”
You’d be on firmer ground if you were talking about an unprofitable company trading for less than its net cash (there are a number of those out there as well). The odds of a profitable company, with no debt, lots of cash in the bank, low fixed costs, and a backlog of business going bankrupt in the near future are fairly slim. That slim prospect of bankruptcy doesn’t seem to warrant a negative value for the business.
Again, I can see reasonable people disagreeing on a value of this company, but assigning a negative value to everything but the company’s cash doesn’t seem reasonable or efficient. What about the $60 million of orders in its backlog? That’s not worth anything? Not even a dollar? What about the prospect of winning those two new government contracts next month? There ought to at least be some optionality value to that.
If you don’t see this as an example of market inefficiency, I’m not sure what you would find as such an example (beyond the arbitrage example you gave previously). This reminds me of the old quip about the Chicago professors/EMH adherents who saw a $20 bill on the street. They didn’t pick it up because they said that, if it were a $20 bill, someone would have picked it up already.
March 16th, 2009 at 3:03 pm
DTM,
“Correct, so one simple way of putting the point we have been discussing is that a negative enterprise value is not inconsistent with the EMH, although it does tend to make firms a target for some sort of takeover.”
The rest of your sentence does not logically follow from the word “correct”.
“Let me be absolutely clear about something: I have no interest in arguing with you about the value of a company I know nothing about in an industry I know nothing about.”
Let me be absolutely clear: I wasn’t asking you to. The reason I brought up a specific company as an example is that when I brought up the point using a theoretical example, you started coming up with implausible theoretical conditions (e.g., a burn rate of $50 million per week for a company with a market cap less than that; a giant legal judgment against the company, etc.) to explain the negative enterprise value.
“So while I am happy to discuss simple issues like why a negative enterprise value is not necessarily a EMH violation…”
Why isn’t a negative enterprise value assigned to a profitable company with no obvious threat of imminent bankruptcy or disaster not an EMH violation? Forget the specific company I mentioned; there are dozens that meet these criteria and are trading with negative enterprise values.
“You are giving an account of the rosy future of this company designed to support your view…”
I have given no such thing. I have no idea what the company’s future holds. The company’s backlog of orders is a fact; its chance of winning those two new government contracts is just that — a chance. Its future is uncertain, not rosy. That’s not the point. The point is not that the business has an uncertain future — all businesses do, to one extent or another. The point is that the market is assigning this business a negative value.
“Another typical example would be where identical expected cash flows had different market prices.”
That’s a typical example? Assuming you are talking about two different companies, it seems perfectly reasonable that the market might assign two different values to those future cash flows — the estimates could have been made by two different analysts, one with a better track record; one company might have a more consistent track record of generating free cash flow, etc. What seems unreasonable is that a stream of expected cash flows (say, from a backlog of business) would be assigned a negative value.
“By the way, a renewed wariness about stocks doesn’t really explain the situation being described with this company. That is because there are many profitable companies which ARE still trading at a positive enterprise value, even though they are also experiencing a decrease of business due to the recession. Hence, what we have been told so far doesn’t really explain why this company in particular finds itself in that position.”
Valuations of companies across the board have declined in recent months; the increase in the number of companies trading below net cash is only the most extreme example. The reason many profitable companies still “ARE” trading at positive enterprise values is because the market is mostly efficient, as I acknowledged it was above.
“Now I realize this little company-specific mystery is supposed to convince me there is a market inefficiency going on here. But again, why is this company subject to this supposed inefficiency, and to such an allegedly extreme degree, and not so many other companies?”
It’s not the only company subject to this apparent inefficiency; there are a number of other profitable companies trading with negative enterprise values. What they seem to have in common (from the ones I’ve come across), is that they tend to be small and micro cap companies. As I mentioned before, I think the market for such small stocks is less efficient than the market for larger, more widely-followed stocks. This seems reasonable, no? A company such as ExxonMobil is owned by numerous institutional investors and followed by dozens of analysts. Many times there is little-to-no analyst coverage of small and micro cap stocks, and most institutional investors are unable to buy these stocks.
“To be absolutely clear once more, I’m not actually interested in trying to figure out what is going on with this company. I just wanted to point out the insufficiency of the inefficiency-based explanation for this scenario that has been suggested here.”
If you feel that that’s what think you’ve done here, we’ll have to agree to disagree.
March 16th, 2009 at 5:49 pm
SDTM,
“Sure you were”
I’ve already explained why I used a specific example, after using a theoretical case. When presented with a theoretical case, you responded with theoretical reasons why a negative enterprise value wasn’t necessarily an EMH violation. What your theoretical reasons amounted to was that the company might be facing an imminent liability greater than the value of its net cash. So I brought up a specific example where that reason doesn’t apply. I could have brought up a dozen or more other examples to illustrate the same point.
“First, again, a negative enterprise value is not a per se indication of a market inefficiency.”
Why not? Even in the case of a currently unprofitable company trading for less than its net cash, unless there is a reasonable risk of the company facing an imminent liability greater than its net cash, why is it efficient to assign a negative value to everything but the company’s cash? Even unprofitable businesses are usually assigned a positive value, which makes sense, given that there’s a chance of them being profitable in the future, and they may also have some valuable assets. Given that, it seems even more inefficient to assign a negative value to a profitable business.
“Second, in any event you still haven’t given a real explanation of why the “mostly” efficient markets have somehow blown it on this particular company, but not so many others.”
Again, KSW isn’t the only profitable company trading for less than its net cash. And the burden isn’t on me to explain why the market prices these companies inefficiently — I believe markets are mostly efficient, not entirely efficient. You’re the one who seems to believe that markets are entirely efficient (notwithstanding your arbitrage example, which to be accurate, is really more of an example of a slight inefficiency between two markets, rather than within a market, and your example of two future cash flows, which isn’t really an EMH violation, for the reasons I explained above.).
“First, there are plenty of small cap stocks not trading with negative enterprise values, so noting this is a small cap stock doesn’t solve the mystery.”
Again, I’ve said the market is mostly efficient, not entirely efficient. Thus, I don’t see it as a mystery that some stocks aren’t efficiently valued. By definition, a mostly efficient market will be partly inefficient. You are the one invoking the “mystery” here.
“Second, it is now quite easy for large investors to quickly identify market inefficiencies in small cap stocks and invest whatever amount in exploiting that inefficiency would maximize their return. Indeed, if you really believed it was as easy as filtering for stocks trading at negative enterprise value, it would be very easy for large investors to find those stocks immediately. So how did they miss this one?”
First, most large investors can’t invest in stocks this small, for reasons I assume you know. Second, of the handful of large investors who can, some are already invested in the specific company I mentioned, KSW (e.g., Renaissance Technologies, DFA). I wouldn’t be surprised if Renaissance and DFA were invested in other small net-nets. Still, the fewer institutional investors that can invest in a security, the less efficient the market for that class of securities is likely to be. Do you contest that point? If so, on what basis?
“Most institutional investors aren’t professional arbitrageurs. In other words, professional arbitrageurs have large accounts, but not everyone with a large account is a professional arbitrageur.”
OK, those two sentences seem completely irrelevant to the italicized comment of mine that preceded them. Feel free to explicate.
“I really don’t see how you have explained anything about the pricing of this stock. Again, lots of other small cap stocks are not trading at negative enterprise values, so your generic explanations aren’t sufficient to explain why this small cap stock in particular, but not others, has fallen victim to your claimed market inefficiency.”
Again, the point isn’t that this one stock in the universe is inefficiently priced; that stock is simply an example of a larger phenomenon. And again, that lots of other small cap stocks are not trading at negative enterprise values is consistent with my point, which I’ve already made at least three or four times, that I believe the market to be mostly efficient, not entirely efficient or entirely inefficient.
If you think a profitable business with a backlog of orders — absent some obvious anvil hanging over the company (e.g., a huge lawsuit about to be decided against it, etc.) — should be worth less than zero, I don’t know what to tell you. It seems intuitively illogical to me. If it doesn’t seem illogical to you, then, again, we’ll have to agree to disagree.
March 16th, 2009 at 6:15 pm
Another point:
Some would argue that many stocks trading with positive enterprise values are also inefficiently priced. I’ve focused on the case of stocks with negative enterprise values above since — barring the proverbial anvil hanging over them (e.g., imminent lawsuit judgment about to bankrupt them, etc.) — these seem to be more obvious examples of market inefficiency.
April 16th, 2009 at 10:12 pm
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