Jim Cramer: Invest in Index Funds

Sounds like Jim Cramer, best known for ranting and raving about individual stocks on TV, has come around to the consensus view about how individuals can best play the stock market:

Most people actually won’t get rich by buying individual stocks, Cramer says. Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won’t beat the market, and you’ll probably lose money," he writes….

Henry Blodget, the former Merrill Lynch (MER) stock analyst who turned writer after being forced from the industry in a scandal, called Cramer a "chair-throwing, self-aggrandizing clown," who gives terrible advice. However, as Blodget wrote in Slate early this year, he’s obviously a smart man who knows better. Cramer embodies "the essential conflict in the American financial industry; the war between intelligent investing (patient, scientific, boring) and successful investment media (frenetic, personality-driven, entertaining)."…

Now, Cramer is echoing the financial advisers who have long warned that individual investors almost never beat the market. The more short-term trades investors make, the more they tend to lose.

When non-professionals (ie, people who don’t devote their lives to trading or people who don’t have deep domain expertise in the sector they’re trading in) tell me they buy and sell individual stocks, I hope to myself that they do so primarily for entertainment / stimulation reasons. In other words, it’s fun to trade and do some research — maybe it’s intellectually stimulating. Fine. But the data are conclusive: it’s very, very hard for non-professional individuals to beat the market on their own. If financial return is your only metric, low-cost index funds seem like the way to go.

(hat tip: Alex Tabarrok)

2 Responses to Jim Cramer: Invest in Index Funds

  1. Krishna says:

    Investing thro index funds, especially when indices are close to their all time peaks and prospects of businesses are not so great in the near term, is not a sound strategy. Thanks to a debilitating mortgage crisis sucking up purchasing power of consumers, businesses are going to be in rough weather. it’s not smart to buy Index funds now because Indices show a higher probability to head southwards. I think you may have to give that theory a little spin to tune it to the times.

    This is the time to go stock specific. We know that US$ is fast depreciating against a basket of currencies and that’s great for companies that have bulk of their revenues coming from exports. When American banks are writing down billions of $$ of subprime losses, they are being bailed out by Sovereign wealth funds from the middle east and someday soon they will be repatriating all that capital. That would mean further erosion of $$ for a fairly long time to come. Fed may come up with occasional infusion of liquidity into the system but that’s not a guarantee to ward of an imminent recession. So you can safely short the dollar for a fairly long time into the future – that means excellent prospects for export firms that have their earnings from stronger currency areas.

    Identify US companies that have a cutting edge, one of the kind types. I think it makes sense now to own stocks of Intel, Apple, Accenture, GE, HP types that have few competitors globally and have significant earnings from stronger currency areas. Go short on domestic consumer plays like Wal-Mart etc. As indices bottom out and get close to 5 year lows that they soon will, start buying index funds and rebalance your portfolio.

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