“The Cramer Effect” – Kiplinger Article Review

Dear Jack,

I’m a subscriber to Kiplinger magazine, not necessarily because I learn a lot from the magazine (a bulk of their articles contradict each other and encourage short term insight) but largely because I want to know what our clients and any prospective clients are hearing – good or bad.  However, in this month’s issue, there is a simply fantastic one pager on “The Cramer Effect” (I’ll link it up once they put it online).  It’s point is that Jim Cramer, the host of CNBC’s Mad Money, has a lot of influence on his viewers, for good or for bad.  Robert Frick, the author of the article, points out seven aspects of the show that may be bad for your investing psychology, and most of these are quite intentional and obvious when identified.  I’ll list these below in italics and then write my own thoughts.

1. Ticker Overload: Ticker streams are mainly babble.  But our brains are wired to see patterns in random data, so they appear meaningful.  Plus, the ticker’s speed whips up our enthusiasm, much like the whirling wheels on a slot machine. Fascinating.  Due to recent events, recapped here, I’ve taken on a new appreciation and understanding of how our brains work.  We truly are influenced, in far heavier ways than we realize, by seemingly subtle things around us.  The ticker on the show, and on any other investing program, gets us excited, just the as the whirling wheels on the slot machine do – and when we get excited, we’re more apt to act on things (buy/sell stocks or gamble in Atlantic City).  This subconscious influence comes up several times in the following points.

2. Bright Lights, Big Noises: Casinos have long known that sounds and flashing lights generate excitement and spur people to act impulsively.  Investment decisions are best made logically, not emotionally. Similar to the above scrolling ticker, the loud sounds and bright lights that Cramer is known for setting off during his segments have a strong influence – as equal if not more than the words Cramer actually says.

3. Shoot From the Hip!: Cramer’s stock picks focus on recent events, and the recency effect – putting too much importance on the near term – blinds us to crucial long-term trends. As a financial planner, we teach our clients to focus on the long term when dealing with investments.  For anyone with a long term goal, such as retirement that’s 10 or more years out, stocks are most likely the best way to meet your goals – and picking stocks based on short term performance is a recipe for disaster.

4. It’s All About Jim: With no one on the set to challenge him, Cramer becomes the undisputed authority figure.  Authority figures hold undue sway over our opinions. I’ve stopped watching the show, after being a somewhat enthusiastic fan in college, but I never realized the truth in this point: no one ever challenges Jim.  I’m sure this is intentional, and it actually makes me think it’s a cowardly move on Jim’s part.  If he’s so sure about his picks, why not have someone challenge them?

5. He talks really, really fast: Cramer is a fast talker, and research has shown that a fast-talking broker is more successful at persuading people to invest than a broker who speaks at a slower pace. Unfortunately, in the investment world, advisors, planners, brokers, whatever you want to call them – are trained on how to sell.  And sell hard.  Most clients don’t recognize the subtle approaches to “landing the sale” but talking fast is one of them.  Clients feel overwhelmed by the overload of information, and oftentimes don’t stop to ask questions because they feel ashamed for not knowing.  In the short term, it puts ethical advisors, like our team, at a disadvantage, but in the long term doing well is accomplished by doing good.

6. Over-confidence Man: Despite a track record that studies have found to be merely average, Cramer exudes unabashed confidence.  That in turn can make viewers over-confident – and overconfidence is perhaps the number one cause of poor investment decisions. This is my favorite video that shows just how wrong Cramer has been in the past.  Please, Jack – click this.  It’s a short clip showing just six days before Bear Stearns was essentially bought for nothing, Cramer pleads with his viewers to stick with the Bear stock.  An exact quote: “Bear Stearns is not in trouble!”  Now, I wouldn’t be picking on Jim just for getting something wrong, because everybody does at some point – but just by the nature of who he is, he really sets himself up for this one.  And just so I am being fair, Cramer admitted he was wrong here as well as trying to explain what he meant.

7. There’s a Reason It Drives Bulls Crazy: the motif of Cramer’s set features the color red, an intense and sometimes angry hue that is known for creating feelings of excitement or agitation. Again, the subconscious influence on our decisions.  If the show just featured a few of these psychological influences, it’d be one thing.  But points 1, 2, 5, and 7 having the same theme is a true concern to be pointed out.

The bottom line is this: people often confuse sound investing advice and entertainment.  The two shouldn’t be co-mingled.  Viewers should not be investing their retirement or education or down-payment savings with the advice given from the show.  And I have no idea of knowing how many are using “play money” versus 401(k) or IRA money from the show’s advice – but I am relatively certain that most people don’t distinguish the two.  Which is extremely unfortunate, because Cramer himself said that the idea of “Mad Money” is money that viewers “can use to invest in stocks … not retirement money, which you want in 401K or an IRA.”  I actually had no idea he said this at any point – so thanks, Wikipedia for pointing that out, with the source, here.  My concern is that most people, like me, had no idea he ever made this distinction, and their long term savings are suffering because of it.  So Jim, if you happen to read this letter, a good idea may be to put that disclosure at the beginning of each of your shows.

I’m not a negative person, Jack, and the point of this letter is not to bash on an accomplished investor like Jim Cramer, but rather to point out some concerns that I’d want you to be aware of.  Until next time, Jack.



One thought on ““The Cramer Effect” – Kiplinger Article Review”

  1. Many interesting points were made. I’d imagine only a fair number of people hang on to Cramer’s every word, but in reality it’s probably far more then that. I’m a fan of the show, and the psychological influencers you mentioned do raise some red flags. Great post.

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