Rethinking Investing – Part 3 – Spotting Mistakes in Jon Stewart vs. Jim Cramer 74 Comments
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.
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 16th, 2009