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)

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